SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 270 and 274
Release No. IC-31828; File No. S7-07-11
RIN 3235-AL02
Removal of Certain References to Credit Ratings and Amendment to the Issuer
Diversification Requirement in the Money Market Fund Rule
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
SUMMARY: The Securities and Exchange Commission (“Commission”) is adopting certain
amendments, initially proposed in March 2011 and re-proposed in July 2014, related to the
removal of credit rating references in rule 2a-7, the principal rule that governs money market
funds, and Form N-MFP, the form that money market funds use to report information to the
Commission each month about their portfolio holdings, under the Investment Company Act of
1940 (“Investment Company Act” or “Act”). The amendments will implement provisions of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). In addition,
the Commission is adopting amendments to rule 2a-7’s issuer diversification provisions to
eliminate an exclusion from these provisions that is currently available for securities subject to a
guarantee issued by a non-controlled person.
DATES: Effective Date: October 26, 2015; Compliance Date: October 14, 2016.
FOR FURTHER INFORMATION CONTACT: Adam Bolter, Senior Counsel;
Erin C. Loomis, Senior Counsel; Amanda Hollander Wagner, Senior Counsel; Thoreau
Bartmann, Branch Chief; or Sarah G. ten Siethoff, Assistant Director, Investment Company
Rulemaking Office, at (202) 551–6792, Division of Investment Management, Securities and
Exchange Commission, 100 F Street NE, Washington, DC 20549–8549.
Table of Contents
I.
II.
BACKGROUND ...................................................................................................................... 3
A.
Credit Rating References ........................................................................................ 3
B.
Exclusion from the Issuer Diversification Requirement ......................................... 6
DISCUSSION ......................................................................................................................... 8
A.
Eligible Securities ................................................................................................... 8
B.
Conditional Demand Features............................................................................... 25
C.
Monitoring Minimal Credit Risks......................................................................... 29
D.
Stress Testing ........................................................................................................ 36
E.
Form N-MFP ......................................................................................................... 37
F.
Exclusion from the Issuer Diversification Requirement ....................................... 43
III.
COMPLIANCE PERIOD FOR THE FINAL RULE AND FORM AMENDMENTS ............................. 58
IV.
PAPERWORK REDUCTION ACT ANALYSIS .......................................................................... 59
V.
ECONOMIC ANALYSIS ........................................................................................................ 71
VI.
REGULATORY FLEXIBILITY ACT CERTIFICATION ............................................................. 108
STATUTORY AUTHORITY ............................................................................................................. 108
TEXT OF RULE AND FORM AMENDMENTS .................................................................................... 109
2
I.
BACKGROUND
A. Credit Rating References
Section 939A of the Dodd-Frank Act requires each federal agency, including the
Commission, to “review any regulation issued by such agency that requires the use of an
assessment of the credit-worthiness of a security or money market instrument and any references
to or requirements in such regulations regarding credit ratings.” 1 That section further provides
that each such agency shall “modify any such regulations identified by the review . . . to remove
any reference to or requirement of reliance on credit ratings and to substitute in such regulations
such standard of credit-worthiness as each respective agency shall determine as appropriate for
such regulations.” 2
As a step toward implementing these mandates, and as a complement to similar initiatives
by other federal agencies, 3 in March 2011 the Commission proposed to replace references to
credit ratings issued by nationally recognized statistical rating organizations (“NRSROs”) in two
rules and four forms under the Securities Act of 1933 (“Securities Act”) and the Investment
Company Act, including rule 2a-7 and Form N-MFP under the Investment Company Act. 4 We
1
Pub. Law 111-203, Sec. 939A(a)(1)-(2). Section 939A of the Dodd-Frank Act applies to all
federal agencies.
2
Pub. Law 111-203, Sec. 939A(b). Section 939A of the Dodd Frank Act provides that agencies
shall seek to establish, to the extent feasible, uniform standards of creditworthiness, taking into
account the entities the agencies regulate and the purposes for which those entities would rely on
such standards.
3
A number of other federal agencies have also taken action to implement Section 939A of the
Dodd-Frank Act, as discussed in Removal of Certain References to Credit Ratings and
Amendment to the Issuer Diversification Requirement in the Money Market Fund Rule,
Investment Company Act Release No. 31184 (Jul. 23, 2014) [79 FR 47986 (Aug. 14, 2014)]
(“2014 Proposing Release” or “Proposing Release”).
4
See References to Credit Ratings in Certain Investment Company Act Rules and Forms,
Investment Company Act Release No. 29592 (Mar. 3, 2011) [76 FR 12896 (Mar. 9, 2011)]
(“2011 Proposing Release”).
3
subsequently adopted certain of the rule provisions proposed in 2011: namely, amendments to
rule 5b-3 under the Investment Company Act, new rule 6a-5 under the Investment Company Act,
and amendments to Forms N-1A, N-2, and N-3 under the Securities Act and the Investment
Company Act. 5 But in light of comments received on the 2011 proposed amendments to rule
2a-7 and Form N-MFP, and in conjunction with the wider money market fund reforms that the
Commission adopted in July 2014 (the “2014 money market fund reforms”), 6 we decided to
re-propose the amendments to rule 2a-7 and Form N-MFP instead of adopting them directly
following the 2011 proposal. 7 Specifically, the 2014 re-proposed amendments to rule 2a-7 and
Form N-MFP (the “2014 Proposing Release,” “Proposing Release,” or “proposal” 8) responded to
concerns that commenters raised with respect to the 2011 proposal.
We received 16 comment letters on the 2014 proposal. 9 The majority of commenters
generally supported the proposed amendments to varying degrees. 10 However, many
5
In December 2013, we adopted amendments removing references to credit ratings in rule 5b-3
and eliminating the required use of credit ratings in Forms N-1A, N-2, and N-3. See Removal of
Certain References to Credit Ratings under the Investment Company Act, Investment Company
Act Release No. 30847 (Dec. 27, 2013) [79 FR 1316 (Jan. 8, 2014)] (“2013 Ratings Removal
Adopting Release”). We adopted new rule 6a-5 on November 19, 2012. See Purchase of Certain
Debt Securities by Business and Industrial Development Companies Relying on an Investment
Company Act Exemption, Investment Company Act Release No. 30268 (Nov. 19, 2012) [77 FR
70117 (Nov. 23, 2012)].
6
See Money Market Fund Reform; Amendments to Form PF, Investment Company Act Release
No. 31166 (Jul. 23, 2014) [79 FR 47736 (Aug. 14, 2014)] (“2014 Money Market Fund Adopting
Release”).
7
See 2014 Proposing Release, supra note 3.
8
For clarity and because the re-proposal issued in July 2014 functions as the proposal for this
adopting release, we refer to the re-proposal simply as the proposal throughout.
9
The comment letters on the Proposing Release (File No. S7-07-11) are available at
http://www.sec.gov/comments/s7-07-11/s70711.shtml. The Commission received 18 comment
letters on the Proposing Release, but 2 of these letters did not discuss amendments to remove
NRSRO credit ratings references from rule 2a-7 and Form N-MFP.
10
Comment Letter of Chris Barnard (Aug. 23, 2014) (“Barnard Comment Letter”); Comment Letter
of Michael Mark-Berger (Jul. 28, 2014) (“Berger Comment Letter”); Comment Letter of
4
commenters expressed concern about the proposed “exceptionally strong” standard to replace
credit ratings references in the requirements of rule 2a-7 for those securities eligible to be
purchased by money market funds. 11 These commenters suggested that the proposed
“exceptionally strong” standard could lead to interpretive confusion in light of the similar
existing “minimal credit risk” requirement, and might potentially change the kinds of securities
that funds could purchase, contrary to the intent of the proposal to retain a similar degree of
credit quality standards as under current rule 2a-7. 12
In adopting final amendments to rule 2a-7 and Form N-MFP to implement Section 939A
of the Dodd-Frank Act, we have carefully considered the comments received, and the final
amendments include certain modifications intended to respond to commenters’ concerns. As
proposed, we are adopting amendments to rule 2a-7 that would remove references to ratings and
adopt a uniform standard to define an eligible security to be a security that has been determined
BlackRock, Inc. (Oct. 14, 2014) (“BlackRock Comment Letter”); Comment Letter of CFA
Institute (Oct. 14, 2014) (“CFA Institute Comment Letter”); Comment Letter of the Investment
Company Institute (Oct. 14, 2014) (“ICI Comment Letter”); Comment Letter of the Independent
Directors Council (Oct. 7, 2014) (“IDC Comment Letter”); Comment Letter of Invesco Ltd. (Oct.
14, 2014) (“Invesco Comment Letter”); Comment Letter of Mutual Fund Directors Forum (Sep.
14, 2014) (“MFDF Comment Letter”); Comment Letter of Charles Schwab Investment
Management, Inc. (Oct. 14, 2014) (“Schwab Comment Letter”).
11
We proposed to replace the reference to NRSRO credit ratings in rule 2a-7’s definition of
“eligible security” with a required finding that each security’s issuer “has an exceptionally strong
capacity to meet its short-term financial obligations.” See 2014 Proposing Release, supra note 3,
at section II.A.1. Many commenters expressed concern about this proposed standard. See
Comment Letter of Better Markets, Inc. (Oct. 14, 2014) (“Better Markets Comment Letter”);
Comment Letter of the Consumer Federation of America (Oct. 14, 2014) (“CFA Comment
Letter”); Comment Letter of the Dreyfus Corporation (Oct. 14, 2014) (“Dreyfus Comment
Letter”); Comment Letter of Fidelity Investments (Oct. 14, 2014) (“Fidelity Comment Letter”);
ICI Comment Letter; Comment Letter of the Committee on Investment Management Regulation
of the New York City Bar (Oct. 14, 2014) (“NYC Bar Comment Letter”); Schwab Comment
Letter; Comment Letter of the Securities Industry and Financial Markets Association (Oct. 14,
2014) (“SIFMA Comment Letter”); Comment Letter of Vanguard (Oct. 14, 2014) (“Vanguard
Comment Letter”); see also infra section II.A.
12
See, e.g., Dreyfus Comment Letter; Fidelity Comment Letter.
5
to present minimal credit risks. However, we have eliminated the proposed “exceptionally
strong capacity” standard from this determination, and as a substitute for this finding, the final
rule amendments require that a minimal credit risk determination include, to the extent
appropriate, an analysis of the guidance factors discussed in the preamble of the Proposing
Release. 13 We believe that this approach will better fulfill the original goals of the rulemaking by
replacing credit ratings references with a new standard that includes objective factors, which is
designed to retain a similar degree of credit quality in money market fund portfolios as under the
current rule.
For these reasons, we are also adopting a similar approach for funds to determine whether
a long-term security subject to a conditional demand feature is an eligible security. 14 Finally, we
are also adopting other amendments to rule 2a-7 and Form N-MFP, including the requirement
that funds engage in ongoing monitoring of their portfolio securities and perform stress testing
for a credit deterioration rather than specifically for a ratings downgrade, substantially as they
were proposed, with certain changes as discussed below.
B. Exclusion from the Issuer Diversification Requirement
Rule 2a-7’s risk limiting conditions require a money market fund’s portfolio to be
diversified, both as to the issuers of the securities it acquires and providers of guarantees and
demand features related to those securities. 15 When we proposed the amendments to rule 2a-7
that were adopted as part of the 2014 money market fund reforms, we discussed and sought
comment on alternatives to the rule’s diversification provisions that we had considered to
13
See rule 2a-7(a)(11); see also infra section II.A.
14
See rule 2a-7(d)(2)(iii); see also infra section II.B.
15
See rule 2a-7(d)(3).
6
appropriately limit money market funds’ risk exposure. 16 Some of the comments we received in
response prompted us to re-evaluate the current exclusion to the issuer diversification
requirement for securities subject to a guarantee issued by a non-controlled person. 17 In
consideration of these comments, and consistent with our reform goal of limiting concentrated
exposure of money market funds to particular economic enterprises, as part of the 2014 proposal
we proposed an amendment that would eliminate this exclusion from rule 2a-7’s issuer
diversification requirement. 18
We received 8 comment letters discussing the proposed issuer diversification
amendment, 19 with most of these commenters opposing the proposed amendment. 20 After
carefully considering the comments we received, as well as the staff’s updated analysis of
relevant data, the Commission is adopting the proposed diversification amendments as
proposed. 21 We believe that, on balance, adopting the proposed issuer diversification amendment
16
See Money Market Fund Reform; Amendments to Form PF, Investment Company Act Release
No. 30551 (Jun. 5, 2013) [78 FR 36834 (Jun. 19, 2013)] (“2013 Money Market Fund Proposing
Release”).
17
See, e.g., 2014 Money Market Fund Adopting Release, supra note 6, at n.1612 and accompanying
text. Current rule 2a-7’s risk limiting conditions generally require that money market funds limit
their investments in the securities of any one issuer of a first tier security (other than government
securities) to no more than 5 percent of total assets. Money market funds must also generally
limit their investments in securities subject to a demand feature or a guarantee to no more than 10
percent of total assets from any one provider. Notwithstanding these conditions, a money market
fund is not required to be diversified with respect to issuers of securities that are subject to a
guarantee issued by a non-controlled person. See current rule 2a-7(d)(3); see also infra section
II.F (detailed discussion of current issuer diversification requirements).
18
See Proposing Release, supra note 3, at section II.C.
19
See Better Markets Comment Letter; BlackRock Comment Letter; Dreyfus Comment Letter; ICI
Comment Letter; Schwab Comment Letter; Comment Letter of the Structured Finance Industry
Group (Oct. 14, 2014) (“SFIG Comment Letter”); SIFMA Comment Letter; Vanguard Comment
Letter.
20
See BlackRock Comment Letter; Dreyfus Comment Letter; ICI Comment Letter; SFIG Comment
Letter; SIFMA Comment Letter; Vanguard Comment Letter.
21
See rule 2a-7(d)(3).
7
will help increase the resiliency of money market funds, and thereby better protect their
investors, by limiting their ability to have concentrated exposure to any particular issuer. We are
also adopting several technical amendments to Form N-MFP and the portfolio diversification
provisions of rule 2a-7. 22
II.
DISCUSSION
A. Eligible Securities
Under current rule 2a-7, money market funds must limit their portfolio investments to
securities that are both “eligible securities” and have been determined by fund boards to pose
minimal credit risks to the fund. 23 Currently, rule 2a-7 defines “eligible securities” largely by
reference to NRSRO ratings, and generally requires that 97% of a fund’s portfolio securities be
rated in the top short-term credit quality category by an NRSRO 24 (known as “first tier”
securities). 25
The proposal would have eliminated the rule’s reference to NRSRO ratings in the eligible
security definition, and consolidated the minimal credit risk standard into a single new standard
under rule 2a-7’s definition of eligible security. 26 As a substitute for NRSRO ratings in the
eligible security definition, the proposed new standard would have required an eligible security
22
See infra sections II.E. and II.F.
23
Current rule 2a-7(d)(2)(i).
24
Rule 2a-7 limits a money market fund’s portfolio investments to “eligible securities,” or securities
that have received credit ratings from the “requisite NRSROs” in one of the two highest shortterm rating categories or comparable unrated securities. A requisite NRSRO is an NRSRO that a
money market fund’s board of directors has designated for use (a “designated NRSRO”) and that
issues credit ratings that the board determines, at least annually, are sufficiently reliable for the
fund to use in determining the eligibility of portfolio securities. See current rule 2a-7(a)(11),
(a)(24).
25
Current rule 2a-7(a)(12). The rule currently also permits up to 3% of a fund’s portfolio to be
invested in so called “second tier” securities, or securities which are rated in the second highest
short-term credit quality category by an NRSRO. Current rule 2a-7(d)(2)(ii).
26
See proposed rule 2a-7(a)(11).
8
to be a security with a remaining maturity of 397 calendar days or less that the fund’s board of
directors (or its delegate 27) determined presents minimal credit risks, which determination would
have included a finding that the security’s issuer has an exceptionally strong capacity to meet its
short-term financial obligations. Thus, under our proposal, a money market fund would have
been limited to investing in securities that the fund’s board (or its delegate) had determined
present minimal credit risks, notwithstanding any rating the security may have received. To
assist funds in their minimal credit risk determination under the revised standard, the proposal
also included as guidance a number of factors that funds should consider, to the extent
appropriate, as part of that process. 28 These credit analysis factors were presented in both a
primary list of factors generally applicable to all securities, and a secondary list of factors
applicable to specific asset classes. In addition, under the proposal, fund boards would no longer
have been required to designate NRSROs or to use their ratings to determine first or second tier
status. 29 Accordingly, the proposal would have eliminated the distinction between first and
second tier securities, and would have removed the prohibition on funds investing more than
27
See current rule 2a-7(j) (permitting a money market fund’s board to delegate to the fund’s
investment adviser or officers a number of the determinations required to be made by the fund’s
board under the rule, including minimal credit risk determinations).
28
Proposing Release, supra note 3, at 47991-47993. The proposal also requested comment on these
factors and whether codifying these factors would further ensure that funds use objective factors
and market data in making credit quality determinations and thereby promote uniformity in
making minimal credit risk determinations and/or assist money market fund managers in
understanding their obligations pertaining to portfolio quality under rule 2a-7.
29
See proposed rule 2a-7(a)(11); 2a-7(d)(2); current rule 2a-7(d)(2)(ii). In conforming changes, the
proposal would have moved the requirement currently in the definition of eligible security that
the issuer of a demand feature or guarantee promptly notify the holder of the security in the event
the demand feature or guarantee is substituted with another demand feature or guarantee (if such
substitution is permissible) to the paragraphs of the rule that address securities subject to
guarantees and conditional demand features. Compare current rule 2a-7(a)(12)(iii)(B) with
proposed rule 2a-7(d)(2)(ii) and 2a-7(d)(2)(iii)(D). We are adopting these amendments as
proposed.
9
3 percent of their portfolios in second tier securities. 30 The intent of these proposed amendments
was to remove references to NRSRO ratings from rule 2a-7 while retaining a degree of credit
risk similar to that permitted under the current rule.
Most of the commenters who discussed the proposed definition of “eligible security”
generally supported it, 31 although, as described below, many of these commenters expressed
certain reservations about details of the Commission’s approach and various aspects of the
proposed definition. Two commenters supported the elimination of the first and second tier
distinction. 32 However, two other commenters expressed concern that removal of the distinction
and the limit on second tier securities could lead to funds purchasing more risky securities. 33
Some of the commenters who supported the amendment stated that the Commission’s proposed
definition of eligible security would provide an appropriate substitute standard of
creditworthiness in rule 2a-7. 34 Other commenters who opposed the definition, 35 and even some
that generally supported the Commission’s approach, 36 cautioned that the lack of objective
criteria in the proposed definition could make it more likely that money market funds would
increase their exposure to riskier securities. Specifically, some commenters argued that the
30
Money market funds also are currently limited from investing more than 0.5% of their assets in
second tier securities of a single issuer and 2.5% of their portfolios in second tier securities
issued, guaranteed or subject to a demand feature issued by the same entity. See current rule 2a7(d)(3)(i)(C) and 2a-7(d)(3)(iii)(C). These limits also would be eliminated under the final rule.
31
See, e.g., CFA Institute Comment Letter; MFDF Comment Letter; Schwab Comment Letter.
32
See Fidelity Comment Letter; MFDF Comment Letter.
33
See Better Markets Comment Letter; CFA Comment Letter.
34
CFA Institute Comment Letter; Invesco Comment Letter; MFDF Comment Letter.
35
CFA Comment Letter; Vanguard Comment Letter.
36
BlackRock Comment Letter; CFA Institute Comment Letter.
10
proposed definition would produce an incentive for money market funds to reach for yield. 37 A
number of commenters also contended that the proposed definition might decrease uniformity
among funds in evaluating credit risk, which could cause certain funds to present significantly
greater risks to investors than others. 38
Some commenters who acknowledged that the removal of credit ratings from rule 2a-7
could create incentives for funds to invest in riskier securities also suggested that certain
countervailing factors would alleviate this concern. These commenters stated that revising the
definition of eligible security should mitigate concerns about increased credit risk and decreased
uniformity by creating a single standard for identifying eligible securities, particularly when
viewed in conjunction with the proposed Form N-MFP disclosure requirements and new
disclosure requirements that were adopted as part of the 2014 money market fund reforms
(which we expect would help to expose the increased volatility and other risks that could
accompany greater investment in riskier portfolio holdings). 39
While generally supporting the overall approach of incorporating the eligible security
definition into the general minimal credit risk determination, multiple commenters expressed
concerns about the proposed secondary “exceptionally strong capacity” standard incorporated in
the proposed definition of eligible security. They suggested that the Commission should
reconsider or clarify this standard for a number of reasons. Several commenters argued that the
word “exceptional” implies something unusual or extraordinary, which could be read as not
including a large number of money market securities of very high credit quality that comprise a
37
See id.
38
BlackRock Comment Letter; CFA Comment Letter; CFA Institute Comment Letter; NYC Bar
Comment Letter; Schwab Comment Letter; Vanguard Comment Letter.
39
See CFA Institute Comment Letter; Invesco Comment Letter; Schwab Comment Letter; SIFMA
Comment Letter.
11
portion of money market fund portfolios today. 40 Commenters also argued that the word
“exceptional” is not commonly used with gradations, yet rule 2a-7 was designed to allow
different gradations of high quality securities. 41 Accordingly, these commenters argued that the
proposed standard might have the effect of restricting the universe of securities which money
market funds could purchase, contrary to the stated goal of the proposal of seeking to retain a
similar degree of credit quality in fund portfolios as under the current rule. 42
Some commenters also contended that the “exceptionally strong capacity” language adds
an unnecessary standard to a money market fund’s minimal credit risk analysis and imposes
burdens on advisers without any corresponding benefit to investors. 43 Specifically, these
commenters argued that money market funds’ minimal credit risk determinations already provide
the framework for making a definitive finding of creditworthiness, and previously provided staff
guidance regarding minimal credit risk factors has enhanced clarity and consistency in the
application of this standard across the industry. 44 Commenters argued that the “exceptionally
strong capacity” standard would result in confusion for the industry45 and operational and
40
Fidelity Comment Letter; Dreyfus Comment Letter; ICI Comment Letter; NYC Bar Comment
Letter; Schwab Comment Letter; SIFMA Comment Letter.
41
Dreyfus Comment Letter; ICI Comment Letter; NYC Bar Comment Letter; SIFMA Comment
Letter.
42
See, e.g., Dreyfus Comment Letter; ICI Comment Letter; NYC Bar Comment Letter; SIFMA
Comment Letter.
43
Dreyfus Comment Letter; Fidelity Comment Letter; SIFMA Comment Letter.
44
Dreyfus Comment Letter; Fidelity Comment Letter; SIFMA Comment Letter. In addition to
presenting updated guidance on credit analysis factors, see supra note 28, the Proposing Release
noted that Commission staff has previously provided guidance on specific factors that a board
could consider in making minimal credit risk determinations under rule 2a-7. See Letter to
Registrants from Kathryn McGrath, Director, Division of Investment Management, SEC (May 8,
1990) (“1990 Staff Letter”); see also Letter to Matthew Fink, President, Investment Company
Institute from Kathryn McGrath, Director, Division of Investment Management, SEC (Dec. 6,
1989) (“1989 Staff Letter”).
45
Dreyfus Comment Letter; Fidelity Comment Letter.
12
procedural burdens 46 that money market funds’ current minimal credit risk analysis does not
entail. Commenters raising these concerns advocated for a modified approach that restricts
money market fund investments to those that the fund’s board (or the board’s delegate)
determines present minimal credit risks, but this determination would not involve an additional
finding that the security’s issuer has an exceptionally strong capacity to meet its short-term
financial obligations (or any similar finding). 47 In addition, some commenters argued that the
difference between the “exceptionally strong” and “very strong” (the proposed new standard
relating to conditional demand features discussed below) standards is not readily apparent, and
argued that a consistent credit risk standard should apply equally to eligible securities and
securities subject to a conditional demand feature, as discussed below. 48
Numerous commenters expressed support for the guidance factors included in the
Proposing Release. 49 One commenter, however, objected to the inclusion of the asset-specific
factors, suggesting that they could become stale and outdated. 50 Commenters who supported the
use of these factors stated that the factors were consistent with best practices and appropriately
tailored. 51 Some commenters presented technical recommendations about specific guidance
factors. 52 One commenter suggested including additional guidance factors regarding
46
Fidelity Comment Letter.
47
Dreyfus Comment Letter; Fidelity Comment Letter; SIFMA Comment Letter.
48
IDC Comment Letter; Schwab Comment Letter; see infra section II.B.
49
See, e.g., Better Markets Comment Letter; BlackRock Comment Letter; CFA Comment Letter;
ICI Comment Letter; IDC Comment Letter; NYC Bar Comment Letter; Schwab Comment Letter.
50
ICI Comment Letter.
51
IDC Comment Letter; MFDF Comment Letter.
52
Fidelity Comment Letter; ICI Comment Letter. The first commenter provided suggestions
regarding guidance on two of the asset-specific credit factors, asset-backed securities and
repurchase agreements. These suggestions have been adopted in this release, as discussed below.
The second commenter suggested that the phrase “worst case scenario” should be removed from
13
counterparty relationships and the effects of rising interest rates on credit risk. 53
Commenters’ opinions varied on whether the guidance factors should be codified.
Multiple commenters expressed support for preserving the factors as guidance, rather than
codifying them, in order to provide funds with flexibility and the ability to respond to changing
market conditions, financing terms, laws, and regulations. 54 Conversely, some commenters
urged the Commission to codify the guidance factors as part of rule 2a-7. 55 One commenter
argued that codification of the factors would enhance investor protections. 56 Another commenter
stated that the inclusion of the factors in rule 2a-7 would promote uniform credit quality
standards in the absence of specific NRSRO ratings requirements, and would facilitate
inspections by Commission staff to aid in maintaining those standards. 57 The commenters who
specifically mentioned the secondary list of asset-specific factors mostly supported them. 58 Two
of these commenters believed that the asset-specific factors should be incorporated into the
rule, 59 but others opposed codification of any of the factors, including the asset-specific ones. 60
the list of general factors. Because the phrase limited the situations that might be analyzed under
this factor, we are not including this phrase in the final rule. See rule 2a-7(a)(11)(i)(C).
53
CFA Institute Comment Letter.
54
ICI Comment Letter; IDC Comment Letter; Schwab Comment Letter. Similarly, some
commenters suggested that the Commission reiterate that the list of factors is not meant to be
exhaustive. See IDC Comment Letter; MFDF Comment Letter; SIFMA Comment Letter.
55
Better Markets Comment Letter; CFA Comment Letter; NYC Bar Comment Letter.
56
Better Markets Comment Letter.
57
NYC Bar Comment Letter. Two of the commenters supporting codification also recommended
that the Commission require a fund’s analysis of the factors to be appropriately documented. See
Better Markets Comment Letter; CFA Comment Letter.
58
Better Markets Comment Letter; BlackRock Comment Letter; MFDF Comment Letter; NYC Bar
Comment Letter; Schwab Comment Letter.
59
Better Markets Comment Letter; NYC Bar Comment Letter.
60
See, e.g., BlackRock Comment Letter; Schwab Comment Letter; ICI Comment Letter. See also
CFA Institute Comment Letter (providing a list of factors that it considered appropriate,
14
One commenter opposed the inclusion of the asset-specific factors even as guidance, stating that
the dynamic nature of the marketplace could cause such specific guidance to become stale and
outdated. 61
1. Revised “Eligible Security” Definition
After review of comments received, we are today adopting a revised standard for eligible
securities under rule 2a-7 that does not require an “exceptionally strong capacity” fund board
finding, but instead requires a single uniform minimal credit risk finding, based on the capacity
of the issuer or guarantor of a security to meet its financial obligations. 62 As a complement to
this uniform minimal credit risk standard, we are also today codifying the general credit analysis
factors into rule 2a-7, the use of which should assist fund boards by serving as objective and
verifiable tools to rely on in the absence of NRSRO ratings and which should help to achieve our
goal of maintaining a similar degree of credit risk as in current money market fund portfolios. 63
We have been persuaded by the commenters that suggested that the “exceptionally strong
comprised of only the primary factors with two suggested additions, though it did not discuss
possible codification).
61
ICI Comment Letter.
62
Rule 2a-7(a)(11). We are also adopting as proposed the elimination of the following defined
terms from the rule: “designated NRSRO,” “first tier security,” “rated security,” “requisite
NRSROs,” “second tier security,” and “unrated security.” We are also making final several
proposed revisions of provisions in the rule that currently reference these terms. See current rule
2a-7(a)(12) (eligible security); rule 2a-7(d)(2) (portfolio quality); rule 2a-7(d)(3)(i)(A)(1) and (C)
(portfolio diversification); rule 2a-7(d)(3)(iii)(C) (portfolio diversification); rule 2a-7(f)(1)
(downgrades); rule 2a-7(h)(3) (record keeping and reporting); rule 2a-7(j) (delegation). In
addition, fund boards will no longer have to designate NRSROs, disclose them in the statement of
additional information or use their ratings to determine first or second tier status. Finally, we are
also adopting as proposed a conforming change to the recordkeeping requirements under the rule
to reflect that funds must retain a written record of the determination that a portfolio security is an
eligible security, including the determination that it presents minimal credit risks.
63
The codified factors only include the general factors that were discussed in the Proposing
Release. Proposing Release, supra note 3, at 47991-47992. The asset-specific factors are not
codified, but revised as discussed in section II.A.2 below, and continue to be included as
guidance.
15
capacity” determination could create an unclear standard for determining eligible securities that
might change the current credit quality profile of money market funds. Variations in how this
language may be understood could lead to some funds only purchasing the lowest risk securities
possible, creating a risk profile even more stringent than the current standard. Others might
interpret the standard differently and not limit their securities purchases in the same way, which
might thereby create significant disparities between money market funds. Such different
interpretations might also lead to difficulties in our inspection staff’s review of compliance with
the proposed standard. We also appreciate commenters’ concerns that it may be difficult to
determine the difference between “exceptionally strong” and other similar standards such as
“very strong” credit quality. Accordingly, the Commission has decided that adopting a uniform
standard based on the well-developed existing requirement that a security present minimal credit
risks, in conjunction with codifying the general factors to be considered, as discussed below, will
more effectively achieve the goals of the proposal.
The requirement that a security present minimal credit risks to a money market fund has
been part of rule 2a-7 since it was adopted in 1983. 64 The minimal credit risk determination was
meant to provide an independent assurance of safety above and beyond the existence of a “high
quality” rating by an NRSRO, as explained in the original adopting release:
[T]he mere fact that an instrument has or would receive a high quality rating may not be
sufficient to ensure stability. The Commission believes that the instrument must be
evaluated for the credit risk that it presents to the particular fund at that time in light of
the risks attendant to the use of amortized cost valuation or penny-rounding (emphasis
added). 65
64
Valuation of Debt Instruments and Computation of Current Price Per Share by Certain Open-End
Investment Companies, Investment Company Act Release No. 13380 (Jul. 11, 1983) [48 FR
32555 (Jul. 18, 1983).]
65
Id. at 32560.
16
Under this existing standard, a board (or its delegate) should determine that a security presents
minimal credit risks not just in isolation, but also in the context of the fund as a whole. The 2014
Proposing Release made clear that the removal of NRSRO ratings is not intended to change the
current risk profile of money market funds, or their evaluation of minimal credit risks. 66 In
determining whether a security presents minimal credit risks, therefore, a board (or its delegate)
should consider not just the individual risks of the security, but also the overall impact of adding
that security to the fund in light of the fund’s other holdings. 67 Such consideration might include
an examination of correlation of risk among the securities held or purchased, the credit risks
associated with market-wide stresses, or specific security credit or liquidity disruptions. Based
on comments received, we are persuaded that this existing requirement to evaluate the minimal
credit risk of portfolio securities on the fund as a whole (not just on a security-by-security basis)
will help mitigate potential risks that money market funds might change their current credit risk
profile after our removal of NRSRO ratings references from the rule as part of the final
amendments.
2. Codified Factors
Although we believe that the minimal credit risk standard should serve as an effective
limitation on credit risk in money market fund portfolios even without the proposed secondary
“exceptionally strong” finding, we appreciate commenters’ concerns that eliminating the “floor”
provided by NRSRO ratings in the rule without a replacement might lead to fund managers
66
See, e.g., Proposing Release, supra note 3, at 47989.
67
In order to clarify that the requirements of the minimal credit risks analysis have not changed
from the original requirements as described in the 1983 release, the phrase “to the fund” has been
added to the final rule definition of eligible security. Rule 2a-7(a)(11). This phrase is intended to
indicate that, unlike a security’s NRSRO rating that measures only the security’s risks in
isolation, the minimal credit risk determination must consider any credit risk introduced by the
security to the entire fund.
17
taking on additional credit risk if the rule does not provide objective and verifiable standards. As
discussed above, several commenters suggested that codifying the general factors would enhance
investor protections and promote uniform credit quality standards in the absence of specific
NRSRO ratings requirements. We agree.
Accordingly, the final rule amendments now include, as part of the analysis of minimal
credit risks, a requirement to consider, to the extent appropriate, the general credit analysis
factors from the Proposing Release. 68 As noted in the Proposing Release, our staff has had
opportunities to observe how money market fund advisers evaluate minimal credit risk, and
although staff has noted a range in the quality and breadth of credit risk analyses among the
money market funds examined, staff has also observed that most of the advisers to these funds
evaluate some common factors that bear on the ability of an issuer or guarantor to meet its shortterm financial obligations. Based on staff observations in examinations and prior staff guidance,
we understand that most money market fund managers already generally take these factors into
account, as appropriate, when they determine whether a portfolio security presents minimal
credit risks. We believe that codifying the general factors will help provide a uniform and
objective check on credit risk that can be verified by our examiners. We also believe that
incorporating these factors into the rule text will further promote effective and uniform
application of the risk standard. Although multiple commenters expressed support for preserving
the factors as guidance, rather than codifying them, 69 the Commission believes that codification
68
Rule 2a-7(a)(11)(i). The Proposing Release included a second list of asset-specific factors that
staff had observed funds making use of for credit analysis of specific types of securities which
will be retained as guidance as discussed further below. Proposing Release, supra note 3, at
47992-47993.
69
ICI Comment Letter; IDC Comment Letter; Schwab Comment Letter. Similarly, some
commenters suggested that the Commission reiterate that the list of factors is not meant to be
exhaustive. See IDC Comment Letter; MFDF Comment Letter; SIFMA Comment Letter. As
18
of these factors is justified by the need for verifiable credit quality determinations in the absence
of required references to NRSRO ratings. In addition, the Commission believes that the changes
to the proposed standard made in this final rule should reduce the likelihood of increased credit
risk because funds will have to perform a rigorous analysis using the codified factors and
consider how each security affects the aggregate risk of the portfolio.
As discussed above, commenters disagreed over the proposed elimination of the first and
second tier distinction, 70 with two commenters expressing concern that removing the distinction
and the limit on second tier securities could lead to funds purchasing more risky securities. 71
However, we believe that the codification of the credit analysis factors in the final rule,
combined with the increased transparency gained through our amendments to Form N-MFP
disclosures (both adopted today, as well as the amendments adopted as part of the 2014 money
market fund reforms 72), should mitigate this concern. The codified credit factors should establish
a minimum baseline that should help guard against the risk that funds’ approach to credit
analysis will become less uniform, or that some funds would substantially increase the riskiness
of their portfolios by increasing their investments in second tier securities. Such changes would
not likely be consistent with a minimal credit risk analysis using the factors we are codifying
today.
Therefore, the final rule requires a money market fund’s board (or its delegate) to
noted below, we state that the list of factors in the rule and the additional factors discussed in this
release as guidance are not meant to be exhaustive, and there may be additional factors that could
be relevant depending on the type of security analyzed.
70
See Fidelity Comment Letter; MFDF Comment Letter; Better Markets Comment Letter; CFA
Comment Letter.
71
See Better Markets Comment Letter; CFA Comment Letter.
72
For example, the 2014 money market fund reforms eliminated the 60-day delay in making public
the information filed on Form N-MFP.
19
consider, in making its minimal credit risk determinations, the capacity of each security’s issuer,
guarantor, or provider of a demand feature, to meet its financial obligations, and in doing so,
consider, to the extent appropriate, the following factors: (1) financial condition; (2) sources of
liquidity; (3) ability to react to future market-wide and issuer- or guarantor-specific events,
including ability to repay debt in a highly adverse situation; and (4) strength of the issuer or
guarantor’s industry within the economy and relative to economic trends, and issuer or
guarantor’s competitive position within its industry. 73 In incorporating the credit analysis factors
into the rule, we have revised them to make them as generally applicable as possible to all money
market funds. As we discussed in the Proposing Release, and as reflected in a number of
comments received, we understand that the majority of the industry already typically considers
these factors when making minimal credit risk determinations. 74 One commenter’s
recommendation suggested that we include as a codified factor an analysis of the existence,
nature, and magnitude of any counterparty relationships. 75 However, in its observations of how
money market funds evaluate minimal credit risk, our staff has not identified this factor as one of
the common factors that bear on the ability of an issuer or guarantor to meet its short-term
financial obligations and we are not aware of other information that suggests that many money
market funds are currently performing (or have the information readily available to perform) this
type of analysis. Accordingly, we are not including as a codified factor an analysis of
counterparty relationships, although we believe that, to the extent that funds have such
73
As explained in the Proposing Release, many of these considerations have been included in staff
guidance as well as in best practices for determining minimal credit risk set forth in Appendix I of
the Report of the Money Market Working Group submitted to the Board of Governors of the
Investment Company Institute in 2009. See also 1990 Staff Letter and 1989 Staff Letter, supra
note 44.
74
See Proposing Release, supra note 3, section II.A.1, at nn.53-57 and accompanying text.
75
CFA Institute Comment Letter.
20
information available, analyzing counterparty relationships should assist funds in making
minimal credit risk determinations.
As discussed in the Proposing Release, the financial condition factor generally should
include examination of recent financial statements, including consideration of trends relating to
cash flow, revenue, expenses, profitability, short-term and total debt service coverage, and
leverage (including financial and operating leverage). The second factor, sources of liquidity,
generally should include consideration of bank lines of credit and alternative sources of liquidity.
The third factor, involving market-wide events, generally should include analysis of risk from
various scenarios, including changes to the yield curve or spreads, especially in a changing
interest rate environment. The fourth factor, the competitive position of the firm and its industry,
generally should include consideration of diversification of sources of revenue, if applicable. 76
As explained in the proposal, in addition to the codified factors used to evaluate the issuer or
guarantor of a security, a minimal credit risk evaluation may also include consideration of
whether the price and/or yield of the security itself is similar to that of other securities in the
fund’s portfolio. 77
The Commission is not codifying the asset-specific factors into the final rule text. As one
commenter pointed out, 78 overly specific and numerous factors could over time become dated.
Consistent with the concern raised by this commenter, the Commission is mindful of the pitfalls
76
See Proposing Release, supra note 3, section II.A.1, at 47991-47992.
77
See 2014 Proposing Release, supra note 3. This consideration is not being incorporated into the
rule text because it does not relate to the overall strength of a security’s issuer or guarantor, as do
the codified factors. We therefore believe that it would be more useful for a fund’s manager to
evaluate a security’s price and/or yield (as compared with other similar portfolio securities) as a
way to quickly assess the appropriateness of a given security, and hence is provided only as
guidance.
78
ICI Comment Letter.
21
that may result from codifying too many factors, and/or factors that are not sufficiently broad and
yet relevant enough to withstand changing markets over time. The Commission believes that
keeping these asset-specific factors as guidance may help avoid any unintended burden while
providing funds with additional and potentially relevant considerations that may be useful when
making minimal credit risk determinations in the absence of required references to NRSRO
ratings. Accordingly, we are limiting the factors we are codifying into the rule itself to the list of
general factors that we believe are sufficiently universal and tested enough to avoid this problem,
but that will form the basis of a rigorous analysis. Nonetheless, where relevant, funds may wish
to consider whether the asset-specific factors should also be evaluated in making minimal credit
risk determinations, especially if they make significant investment in such asset classes. In
addition, we have included a cross reference in the rule text to the guidance regarding the asset
specific factors, to better inform readers of the applicability of the asset specific factor guidance
discussed here. 79
Accordingly, to the extent applicable, fund advisers may wish to consider the following
asset-specific factors:
•
For municipal securities: (i) sources of repayment; (ii) issuer demographics
(favorable or unfavorable); 80 (iii) the issuer’s autonomy in raising taxes and revenue;
(iv) the issuer’s reliance on outside revenue sources, such as revenue from a state or
federal government entity; and (v) the strength and stability of the supporting
economy. 81
79
We have also incorporated technical recommendations from two commenters on the assets
specific factor guidance. ICI Comment Letter; Fidelity Comment Letter. We have (1) combined
the two bullets on repurchase agreements into one; (2) altered language in the guidance on
repurchase agreements, reflecting increased standardization of the market; and (3) removed the
reference to analyzing underlying assets in the asset-backed securities bullet.
80
Demographics could include considerations such as the type, size, diversity and growth or decline
of the local government’s tax base, including income levels of residents, and magnitude of
economic activity.
81
See 1989 Staff Letter, supra note 44 (additional factors such as sources of repayment, autonomy
22
•
For conduit securities under rule 2a-7: 82 analysis of the underlying obligor for all
securities except asset-backed securities (including asset-backed commercial paper). 83
•
For asset-backed securities, such as asset-backed commercial paper: (i) analysis of
the terms of any liquidity or other support provided; and (ii) legal and structural
analyses to determine that the particular asset-backed security involves no more than
minimal credit risks for the money market fund. 84
•
For other structured securities, such as variable rate demand notes, 85 tender option
in raising taxes and revenue, reliance on outside revenue sources and strength and stability of the
supporting economy should be considered with respect to tax-exempt securities); see also
Guidance on Due Diligence Requirements in Determining Whether Securities are Eligible for
Investment, Office of the Comptroller of the Currency, Docket ID OCC-2012-0006 [77 FR 35259
(Jun. 13, 2012)] (“OCC Guidance”) (matrix of examples of factors for national banks and federal
savings associations to consider as part of a robust credit risk assessment framework (“OCC
credit risk factors”) for certain investment securities includes capacity to pay and assess operating
and financial performance levels and trends).
82
Under rule 2a-7, a “conduit security” means a security issued by a municipal issuer involving an
arrangement or agreement entered into, directly or indirectly, with a person other than a
municipal issuer, which arrangement or agreement provides for or secures repayment of the
security. Rule 2a-7(a)(7). A “municipal issuer” is defined under the rule to mean a state or
territory of the United States (including the District of Columbia), or any political subdivision or
public instrumentality of a state or territory of the United States. Id. A conduit security does not
include a security that is: (i) fully and unconditionally guaranteed by a municipal issuer;
(ii) payable from the general revenues of the municipal issuer or other municipal issuers (other
than those revenues derived from an agreement or arrangement with a person who is not a
municipal issuer that provides for or secures repayment of the security issued by the municipal
issuer); (iii) related to a project owned and operated by a municipal issuer; or (iv) related to a
facility leased to and under the control of an industrial or commercial enterprise that is part of a
public project which, as a whole, is owned and under the control of a municipal issuer. Id.
83
See OCC Guidance, supra note 81 (OCC credit risk factors for revenue bonds include
consideration of the obligor’s financial condition and reserve levels).
84
See Money Market Fund Reform, Investment Company Act Release No. 29132 (Feb. 23, 2010)
[75 FR 10060 (Mar. 4, 2010)] (“2010 Money Market Fund Adopting Release”) at section II.A.3
(citing Revisions to Rules Regulating Money Market Funds, Investment Company Act Release
No. 21837 (Mar. 21, 1996) [61 FR 13956 (Mar. 28, 1996)] (“1996 Money Market Fund Adopting
Release”) at section II.E.4).
85
A variable rate demand obligation (“VRDO”) (which includes variable rate demand notes) is a
security for which the interest rate resets on a periodic basis and holders are able to liquidate their
security through a “put” or “tender” feature, at par. To ensure that the securities are able to be
“put” or “tendered” by a holder in the event that a remarketing agent is unable to remarket the
security, a VRDO typically operates with a liquidity facility – a Letter of Credit or Standby Bond
Purchase Agreement – that ensures that an investor is able to liquidate its position. See Electronic
Municipal Market Access, Understanding Variable Rate Demand Obligations, available at
http://emma.msrb.org/EducationCenter/UnderstandingVRDOs.aspx.
23
bonds, 86 extendible bonds 87 or “step up” securities, 88 or other structures: in addition to
analysis of the issuer or obligor’s financial condition, analysis of the protections for
the money market fund provided by the legal structure of the security. 89
•
For repurchase agreements under rule 2a-7: a financial analysis and assessment of
the minimal credit risk of the counterparty, an assessment as to whether the haircut
level is appropriate for the particular type of collateral based upon price volatility in
the market for such collateral type, and a legal analysis of the protections for the
money market fund provided by the terms of the repurchase agreements.
The list of factors in the rule and the additional factors discussed in this release as
guidance are not meant to be exhaustive, and there may be additional factors that could be
relevant depending on the type of security analyzed. We recognize that the range and type of
specific factors appropriate for consideration could vary depending on the category of issuer and
particular security or credit enhancement under consideration, and that the board (or its delegate)
therefore may determine to include other factors in its credit assessment. 90 We also recognize
86
A tender option bond is an obligation that grants the bondholder the right to require the issuer or
specified third party acting as agent for the issuer (e.g., a tender agent) to purchase the bonds,
usually at par, at a certain time or times prior to maturity or upon the occurrence of specified
events or conditions. See Municipal Securities Rulemaking Board, Glossary of Municipal
Securities Terms, Tender Option Bond, available at
http://www.msrb.org/glossary/definition/tender-option-bond.aspx. Tender option bonds are
synthetically created by a bond dealer or other owner of a long-term municipal obligation
purchased in either the primary or secondary markets, or already in a portfolio.
87
An extendible bond is a long-term debt security with an embedded option for either the investor
or the issuer to extend its maturity date. To qualify as an eligible security under rule 2a-7, the
issuer must not have the right to extend the maturity of the bond so that it is more than 397 days
to maturity at any time. Typically, if an extendible bond is of the type that qualifies as an eligible
security under rule 2a-7, a money market fund will have the option to either extend the maturity
of the bond to no more than 397 days in the future, or elect not to extend, in which case the
bond’s maturity must be no longer than 397 days at that time.
88
A “step up” security pays an initial interest rate for the first period, and then a higher rate for the
following periods.
89
See OCC Guidance, supra note 81 (OCC credit risk factors for structured securities include
evaluation and understanding of specific aspects of the legal structure including loss allocation
rules, potential impact of performance and market value triggers, support provided by credit and
liquidity enhancements, and adequacy of structural subordination).
90
As discussed in the 2014 Proposing Release, supra note 3, money market fund boards of directors
24
that specific purchases may require more or less analysis depending on the security’s risk
characteristics. As discussed in greater detail below, amended rule 2a-7 will also require that the
written record of the minimal credit risk determination address any factors considered and the
analysis of those factors. 91
B. Conditional Demand Features
Rule 2a-7 limits money market funds to investing in securities with remaining maturities
of no more than 397 days. 92 A long-term security subject to a conditional demand feature 93
(“underlying security”), however, may be determined under the current rule to be an eligible
security (or a first tier security) if among other conditions: (i) the conditional demand feature is
an eligible security or a first tier security; and (ii) the underlying security (or its guarantee) has
received either a short-term rating or a long-term rating, as the case may be, within the highest
two categories from the requisite NRSROs or is a comparable unrated security. 94 The rule
currently requires this analysis of both the short-term and long-term credit aspects of the demand
instrument because a security subject to a conditional demand feature combines both short-term
typically delegate minimal credit risk determinations to the fund’s adviser, as provided for in rule
2a-7(j).
91
See infra section II.C.; rule 2a-7(h)(3).
92
See current rule 2a-7(a)(12).
93
A conditional demand feature is a demand feature that a fund may be precluded from exercising
because of the occurrence of a condition. See rule 2a-7(a)(6) (defining “conditional demand
feature” as a demand feature that is not an unconditional demand feature); rule 2a-7(a)(30) and
proposed rule 2a-7(a)(25) (defining “unconditional demand feature” as a demand feature that by
its terms would be readily exercisable in the event of a default in payment of principal or interest
on the underlying security). For purposes of rule 2a-7, a demand feature allows the security
holder to receive, upon exercise, the approximate amortized cost of the security, plus accrued
interest, if any, at the later of the time of exercise or the settlement of the transaction, paid within
397 calendar days of exercise. Current rule 2a-7(a)(9).
94
Current rule 2a-7(d)(2)(iv). Although underlying securities are generally long-term securities
when issued originally, they become short-term securities when the remaining time to maturity is
397 days or less.
25
and long-term credit risks. 95
The Commission’s proposal would have required a similar analysis, but consistent with
Section 939A of the Dodd-Frank Act, it would have removed the requirement in the rule that the
fund board (or its delegate) consider credit ratings of underlying securities. 96 Under the proposal,
a fund would have had to determine, as with any short-term security, that the conditional demand
feature is an eligible security. 97 In addition, a fund’s board of directors (or its delegate) would
have had to evaluate the long-term risk of the underlying security and determine that it (or its
95
The quality of a conditional demand instrument depends both on the ability of the issuer of the
underlying security to meet scheduled payments of principal and interest and upon the availability
of sufficient liquidity to allow a holder of the instrument to recover the principal amount and
accrued interest upon exercise of the demand feature. See Acquisition and Valuation of Certain
Portfolio Instruments by Registered Investment Companies, Investment Company Act Release
No. 14607 (Jul. 1, 1985) [50 FR 27982 (Jul. 9, 1985)], at n.33. The current rule permits the
determination of whether a security subject to an unconditional demand feature is an eligible or
first tier security to be based solely on whether the unconditional demand feature is an eligible or
first tier security because credit and liquidity support will be provided even in the event of default
of the underlying security. See current rule 2a-7(d)(2)(iii).
96
In a conforming change, the Commission proposed to remove two provisions in current rule 2a-7
that reference credit ratings in connection with securities subject to a demand feature or guarantee
of the same issuer that are second tier securities: rule 2a-7(d)(3)(i)(C) (limiting a fund’s
investments in securities subject to a demand feature or guarantee of the same issuer that are
second tier securities to 2.5% of the fund’s total assets); rule 2a-7(f)(1)(iii) (providing that if, as a
result of a downgrade, more than 2.5% of a fund’s total assets are invested in securities issued by
or subject to demand features from a single institution that are second tier securities, a fund must
reduce its investments in these securities to no more than 2.5% of total assets by exercising the
demand feature at the next succeeding exercise date(s)). In other conforming changes, the
Commission proposed to amend two rules under the Act that reference the definition of “demand
feature” and “guarantee” under rule 2a-7, which references would have changed under the
proposed amendments. Specifically, the Commission proposed to amend: (i) rule
12d3-1(d)(7)(v), to replace the references to “rule 2a-7(a)(8)” and “rule 2a-7(a)(15)” with
“§ 270.2a-7(a)(9)” and “§ 270.2a-7(a)(16)”; and (ii) rule 31a-1(b)(1), to replace the phrase “(as
defined in § 270.2a-7(a)(8) or § 270.2a-7(a)(15) respectively)” with “(as defined in
§ 270.2a-7(a)(9) or § 270.2a-7(a)(16) respectively.)” We are adopting these changes as proposed.
97
See proposed rule 2a-7(d)(2)(iii)(A). The Proposing Release also reiterated the existing
monitoring and substitutability requirements for conditional demand features in rule 2a-7, and
noted that the Commission believed it would be prudent for a money market fund to avoid
investing in securities whose eligibility as portfolio securities depended on a conditional demand
feature that may be terminated if the underlying portfolio security is downgraded a single ratings
category. See Proposing Release, supra note 3, at n.90 and accompanying and preceding text.
26
guarantor) “has a very strong capacity for payment of its financial commitments.” 98 We
proposed this standard because it was similar to those articulated by credit rating agencies for
long-term securities assigned the second highest rating. 99 Because the conditional demand
feature could be terminated by a ratings downgrade, we believed that the underlying security
should present only limited credit risk. 100
The commenters who addressed this section generally opposed the proposed approach of
requiring a different “very strong” standard for conditional demand features as compared to the
proposed “exceptionally strong” standard for all other eligible securities. Instead, most
commenters that addressed this issue suggested that the Commission adopt a single uniform
standard for both eligible securities and conditional demand features as such a uniform standard
would eliminate any potential inconsistences and confusion. We agree, and therefore the final
amendments do not include the proposed “very strong” standard for conditional demand features,
but instead apply the single uniform minimal credit risk standard (including an analysis of
relevant factors) for all eligible security determinations, including conditional demand features.
Most commenters’ discussion of the credit analysis of securities subject to conditional
demand features focused on aligning the credit quality standard for these securities with the
standard used to identify eligible securities generally. 101 One commenter stated that employing
the same standard would minimize confusion among investors. 102 Another commenter argued
98
Proposed rule 2a-7(d)(2)(iii)(C). An underlying security that is a short-term security (because its
remaining maturity is less than 397 days, although its original maturity may have been longer)
also would have had to meet the proposed standard.
99
See Proposing Release, supra note 3, at n.83 and accompanying text.
100
Id, at n.89 and accompanying text.
101
Dreyfus Comment Letter; ICI Comment Letter; IDC Comment Letter; Schwab Comment Letter.
102
IDC Comment Letter.
27
that the termination of a conditional demand feature has much the same effect as a default on
other securities, and thus the degree of risk permitted with respect to the termination of a
conditional demand feature should be equivalent to the risk of default with respect to other
eligible securities. 103 Commenters were split in their opinions about what uniform standard to
use, if the same credit quality standard were to be employed for eligible securities and securities
subject to a conditional demand feature. Some argued that the “very strong” capacity standard
should be used in both contexts.104 Commenters who advised that the minimal credit risk
standard should stand alone, without an additional “exceptionally strong capacity” finding (or
similar finding), maintained that this stand-alone minimal credit risk standard should apply
equally to eligible securities and securities subject to a conditional demand feature. 105
We agree with these commenters’ concerns and are adopting the rule amendments
without the proposed “very strong capacity” standard. 106 Instead, the final amendments require
application of a single uniform “minimal credit risk” standard that will apply to all securities
purchased by money market funds, pursuant to the revised eligible security definition as
discussed above. 107 We agree with commenters’ reasoning that a uniform credit quality standard
would be appropriate given the similar degree of risk presented by the termination of a
conditional demand feature and the default of a portfolio security. We also agree with
commenters that the difference between the terms “very strong” and “exceptionally strong” is
not readily apparent and that a uniform minimal credit risk standard will thus reduce confusion,
103
ICI Comment Letter. See also supra note 93.
104
ICI Comment Letter; Schwab Comment Letter.
105
Dreyfus Comment Letter; Fidelity Comment Letter.
106
Rule 2a-7(d)(2)(iii).
107
Rule 2a-7(a)(11).
28
and still preserve a similar degree of credit quality to that currently present in fund portfolios.
Therefore, under the uniform standard that we are adopting today for conditional demand
features, a fund’s board (or its delegate) must determine that both the conditional demand feature
and the underlying security (or guarantee) are eligible securities. 108
As noted in the Proposing Release and reiterated here, we do not believe that securities
that are rated by NRSROs in the third-highest category for long-term ratings (or comparable
unrated securities) would satisfy the standard that underlying securities present minimal credit
risks to the fund. We also note that funds currently can invest exclusively in underlying
securities rated in the second-highest category if the instrument meets the other conditions for
eligibility. 109 We estimate that most underlying securities held by money market funds (77
percent) are rated in the second-highest long-term category, and a smaller portion (23 percent)
are rated in the highest long-term category. 110 For these reasons, we do not currently anticipate
that funds are likely to increase the portion of their underlying securities that are rated in the
second-highest long-term category as a result of the adopted amendments (since these funds do
not currently invest in these securities to the extent permitted under existing rules).
C. Monitoring Minimal Credit Risks
Currently, rule 2a-7 requires a money market fund board (or its delegate) to promptly
reassess whether a security that has been downgraded by an NRSRO continues to present
108
The credit risk standard that is being adopted for conditional demand features aligns the credit
quality standard for these securities with the standard used to identify eligible securities by
requiring the fund’s board (or its delegate) to determine that these securities are eligible
securities. We note that such a determination, by expressly incorporating the definition of
eligible securities, will also incorporate the requirement of a fund to consider, to the extent
appropriate, the general credit analysis factors discussed above. Rule 2a-7(a)(11); see supra
section II.A.2 (“Codified Factors”).
109
Current rule 2a-7(d)(2)(iv).
110
See infra note 258 and accompanying text.
29
minimal credit risks, and to take such action as it determines is in the best interests of the fund
and its shareholders. 111 In the Proposing Release, the Commission proposed to eliminate this
requirement and instead require each money market fund to adopt written procedures that would
require the fund adviser to provide an ongoing review of the credit quality of each portfolio
security to determine that the security continues to present minimal credit risks. 112
As discussed in the Proposing Release, such ongoing monitoring of minimal credit risks
would include the determination of whether the issuer of the portfolio security, and the guarantor
or provider of a demand feature, to the extent relied upon by the fund to determine portfolio
quality, maturity or liquidity, continues to have the capacity to repay its financial obligations
such that the security presents minimal credit risks. The review would typically update the
information that was used to make the initial minimal credit risk determination and would have
to be based on, among other things, financial data of the issuer or provider of the guarantee or
demand feature. 113 The Commission noted that funds could continue to consider external factors,
including credit ratings, as part of the ongoing monitoring process. 114
All of the commenters who addressed the ongoing monitoring provision supported the
111
Rule 2a-7(f)(1)(i)(A). This current reassessment is not required, however, if the downgraded
security is disposed of or matures within five business days of the specified event and in the case
of certain events (specified in rule 2a-7(f)(1)(i)(B)), the board is subsequently notified of the
adviser’s actions. Rule 2a-7(f)(1)(ii). In addition, rule 2a-7 requires ongoing review of the
minimal credit risks associated with securities for which maturity is determined by reference to a
demand feature. Rule 2a-7(g)(3).
112
Proposing Release, supra note 3, at 47994-47996; proposed rule 2a-7(g)(3). The Commission
proposed to remove current rule 2a-7(f)(1)(i) (downgrades) and 2a-7(g)(3) (securities for which
maturity is determined by reference to demand features). Proposed rule 2a-7 included a new
paragraph (g)(3), which would contain the required procedures for the ongoing review of credit
risks.
113
See proposed rule 2a-7(g)(3)(ii).
114
We note that a fund adviser’s obligation to monitor risks to which the fund is exposed will, as a
practical matter, require the adviser to monitor for downgrades by relevant credit rating agencies
because such a downgrade would likely affect the security’s market value.
30
proposed requirement. 115 Commenters agreed with the Commission’s belief that most fund
advisers currently engage in similar types of ongoing monitoring and that an explicit monitoring
requirement would not significantly change current fund practices, 116 nor would it impose
significant extra costs. 117 Commenters also stated that the ongoing monitoring requirement
would assist funds to better position themselves to quickly identify potential risks of credit
events that could impact portfolio security prices. 118 Accordingly, as discussed in more detail
below, we are now adopting these amendments as proposed. 119
1. Frequency of Monitoring
Three commenters requested more specificity regarding the frequency of the monitoring
requirement. 120 One of these commenters requested that the Commission adopt a specific
periodic basis for the ongoing review, so that the process would occur with a minimum
frequency. 121 The other two commenters requested that the Commission make clear that
“ongoing” monitoring does not necessarily mean a constant or daily evaluation.
We are not specifying a periodic basis for the ongoing monitoring requirement adopted
115
See Barnard Comment Letter; BlackRock Comment Letter; CFA Institute Comment Letter;
Dreyfus Comment Letter; Fidelity Comment Letter; ICI Comment Letter; IDC Comment Letter;
Invesco Comment Letter; Schwab Comment Letter; Vanguard Comment Letter.
116
All commenters that specifically addressed this issue agreed with the Commission’s
understanding of current practices. See BlackRock Comment Letter; Fidelity Comment Letter;
Barnard Comment Letter; Schwab Comment Letter. Although the NYC Bar Comment Letter did
not specifically answer this question, it suggested that the Proposing Release had not presented a
sufficiently detailed description of those current practices. This comment is discussed further
below.
117
The only commenter to address the question about costs stated that it did not believe that most
funds would experience additional costs beyond the initial adoption and implementation. See
Schwab Comment Letter.
118
Fidelity Comment Letter; Schwab Comment Letter; Barnard Comment Letter.
119
Rule 2a-7(g)(3).
120
Better Markets Comment Letter; NYC Bar Comment Letter; SIFMA Comment Letter.
121
Better Markets Comment Letter.
31
today. As a preliminary matter, doing so would conflict with the intent of an explicit ongoing
monitoring requirement. Specifying a periodic frequency for monitoring might suggest that
regular awareness of the credit profile of portfolio securities is not required, and might also
interfere with the discretion of fund managers to react to changing market conditions. In
addition, as discussed above, specifying the frequency of monitoring would be inconsistent with
our understanding of how a majority of the industry currently evaluates minimal credit risk. 122
Although we are not codifying a specific frequency upon which monitoring must occur,
we expect that for purposes of the rule, ongoing monitoring would mean that monitoring efforts
should occur on a regular and frequent basis. We understand that many funds today engage in
daily monitoring of changes in the markets or conditions relating to issuers that may affect their
credit evaluation of portfolio holdings, and do so even on an hourly basis if there are rapidly
changing events. We believe that this type of monitoring is consistent with the ongoing
monitoring requirement adopted today.
One commenter who requested a specific periodic basis for minimal credit risk
evaluations also suggested that the Commission require that the fund’s board be notified when a
portfolio security no longer meets the minimal credit risk standard (and thus, the definition of an
eligible security). 123 As a general matter, the Commission expects, as explained in the Proposing
Release, that a fund board generally will establish procedures for the adviser to notify the board
when a security no longer meets the minimal credit risk standard, and thus expect that a board
122
Similarly, in response to the Commission’s query as to whether the rule should include specific
objective events that would require a reevaluation of minimal credit risks, the only commenter to
address the question stated that such a change might cause fund managers to limit their reviews to
those triggering events, rather than truly evaluating risk on an ongoing basis. Schwab Comment
Letter. We agree, and are not requiring specific events that would trigger a reevaluation.
123
Better Markets Comment Letter.
32
would be notified as the commenter suggested. We also note that under current rule 2a-7 and the
final rule, a fund must dispose of a security that is no longer an eligible security, unless the board
makes a finding that it would not be in the interests of the fund to do so. 124 Therefore, if a fund
chooses not to dispose of a security that is no longer an “eligible security,” the fund’s board will
already have had the notice sought by this commenter, and thus we do not believe that further
specific notification requirements are necessary.
2. Recordkeeping
Today, funds are required to retain a written record of the determination that a portfolio
security is an eligible security, including the determination that it presents minimal credit risks.
If the proposed requirement to conduct an ongoing review of the credit quality of a fund’s
portfolio securities were adopted, rule 2a-7’s current recordkeeping requirement could have been
understood to require the fund to provide for an ongoing documentation of the adviser’s ongoing
review, which could prove burdensome. Accordingly, we had proposed to make conforming
amendments to the recordkeeping provision, requiring the fund to maintain and preserve a
written record of the determination that a portfolio security presents minimal credit risks at the
time the fund acquires the security, or at such later times (or upon such events) that the board of
directors determines that the investment adviser must reassess whether the security presents
minimal credit risks. 125
One commenter objected to the way the recordkeeping provision was phrased, stating
that the rule was not clear as to the extent of the monitoring and whether and when
124
Current rule 2a-7(f)(2)(ii).
125
See proposed rule 2a-7(h)(3).
33
recordkeeping was required. 126 However, another commenter expressed support for how the
Commission proposed the new recordkeeping requirement. 127 We are adopting the amendments
as proposed and reiterate that the recordkeeping amendments require recordkeeping of the
minimal credit risk determination only when the security is first acquired or during periodic or
event-driven reassessments, as determined by the board (or its delegate).
3. Other Issues
Three commenters objected to the nature of the standard to be applied in determining
minimal credit risks through ongoing monitoring. 128 Two of these commenters objected to the
need to determine on an ongoing basis that the capacity to repay short-term financial obligations
is “exceptionally strong.” The other commenter requested that the standard be made clearer and
stronger by inclusion of the specific factors to be considered in determining whether a security
presents minimal credit risks. We note that the final amended definition of “eligible security”
addresses these comments by eliminating the “exceptionally strong” standard and also codifying
general credit analysis factors. 129
The proposed amendments specified that government securities would not be subject to
the initial minimal credit risk determination or the ongoing monitoring requirement. One
commenter suggested that money market funds held in the fund’s portfolio, which also would
not be subject to the initial minimal credit risk determination, should be treated the same and
carved out of the ongoing monitoring requirement as well. 130 We are not making such a change
126
NYC Bar Comment Letter.
127
ICI Comment Letter.
128
Dreyfus Comment Letter; BlackRock Comment Letter; Better Markets Comment Letter.
129
Rule 2a-7(a)(11). See supra section II.A.
130
ICI Comment Letter. (The Vanguard Comment Letter expressed support for the ICI comments.)
34
to the rule because we believe there are significant differences between the risk profile of
government securities and shares of money market funds, as was evident in the recent financial
crisis, that make ongoing monitoring prudent for shares of money market funds. 131 Nonetheless,
the difference in risk profiles between shares of money market funds and other portfolio
securities may influence the specific written ongoing monitoring procedures adopted by the
board pursuant to this final rule. 132
We believe that explicitly requiring that funds perform ongoing monitoring of credit
risks will help to ensure that funds are better positioned to quickly identify potential risks of
credit events that could impact portfolio security prices and ultimately, for certain funds, the
ability of the fund to maintain its stable net asset value. 133 Accordingly, we are adopting these
amendments largely as proposed.
The ICI Comment Letter also suggested two technical corrections to the ongoing monitoring
provision, which the Commission is adopting. First, the language of clause (i) of 2a-7(g)(3) has
been made consistent with the language of clause (ii) and now includes reference to the financial
data of a provider of a guarantee or demand feature in addition to the financial data of an issuer of
a security. Also, an erroneous citation in 2a-7(g)(3)(ii) has been corrected.
131
For example, in the 2014 Money Market Fund Adopting Release, we discussed how investor
money flowed out of institutional prime money market funds and into government money market
funds (and government securities) during the financial crisis following the Reserve Primary
Fund’s “breaking the buck.” See 2014 Money Market Fund Adopting Release, supra note 6, at
sections II.B and D.
132
For example, a fund may decide to use different outside sources to assist it in evaluating the
ongoing credit quality of portfolio securities it determines present a heightened credit risk profile
(as compared with other portfolio securities held by the fund).
133
As under the current rule and discussed in the proposal, the process undertaken by the fund’s
board (or adviser) for establishing credit quality and the records documenting that process would
be subject to review in regulatory examinations by Commission staff. See 2014 Proposing
Release, supra note 3. In the context of such an examination, a fund should be able to support
each minimal credit risk determination it makes with appropriate documentation to reflect that
process and determination. A fund that acquires portfolio securities without having adopted,
maintained, or implemented written policies and procedures reasonably designed to assess
minimal credit risk, as required under rules 2a-7 and 38a-1, could be subject to disciplinary action
for failure to comply with those rules. See id. See also Ambassador Capital Management LLC,
et al., Investment Company Act Release No. 30809 (Nov. 26, 2013).
35
D. Stress Testing
Money market funds currently must adopt written procedures for stress testing their
portfolios and perform stress tests according to these procedures on a periodic basis. 134 These
required tests include consideration of certain hypothetical events, including the downgrade of
particular portfolio security positions. 135 In the Proposing Release, the Commission proposed to
replace this reference to ratings downgrades in the stress testing requirement with a hypothetical
event that is designed to have a similar impact on a money market fund’s portfolio, namely an
“event indicating or evidencing credit deterioration” of particular portfolio security positions. 136
Thus, under the proposed amendments, funds could continue to test their portfolios against a
potential downgrade or default in addition to any other indication or evidence of credit
deterioration they determine appropriate.
All commenters addressing the stress testing amendment supported it. 137 One commenter
suggested that allowing a choice of hypothetical events to be used would improve disclosure by
increasing variation in the testing. 138 Another commenter stated that it would prefer retaining the
original reference to a downgrade, but that the proposed change was appropriate. 139 We continue
to believe that amending the stress testing provision as proposed will continue to promote
134
See current rule 2a-7(g)(8).
135
See current rule 2a-7(g)(8)(i).
136
Proposing Release, supra note 3, at 47996-47997; proposed rule 2a-7(g)(8)(i)(B) (the proposal
would require stress testing for an event indicating or evidencing the credit deterioration, such as
a downgrade or default, of a portfolio security position representing various portions of the fund’s
portfolio (with varying assumptions about the resulting loss in the value of the security), in
combination with various levels of an increase in shareholder redemptions).
137
ICI Comment Letter; Barnard Comment Letter; BlackRock Comment Letter; CFA Institute
Comment Letter; MFDF Comment Letter; Vanguard Comment Letter.
138
CFA Institute Comment Letter.
139
MFDF Comment Letter.
36
effective stress testing while implementing Section 939A of the Dodd-Frank Act. Accordingly,
we are adopting the amendment as proposed.
E. Form N-MFP
As part of the money market fund reforms adopted in 2010, money market funds must
provide to the Commission a monthly electronic filing of portfolio holdings information on Form
N-MFP. 140 The information that money market funds must disclose with respect to each
portfolio security (and any guarantee, demand feature, or other enhancement associated with the
portfolio security) includes the name of each designated NRSRO for the portfolio security and
the rating assigned to the security. 141 Our staff, however, issued a no-action letter in response to
the passage of Section 939A of the Dodd-Frank Act indicating that, among other things, they
would not object if a fund did not “designate NRSROs and [did] not make related disclosures in
its statement of additional information before the Commission has completed the review of rule
2a-7 required by the [Dodd-Frank Act] and has made any modifications to the rule.” 142
Notwithstanding the staff’s position, many funds are already reporting this information on Form
N-MFP.
Instead of disclosure of designated NRSRO ratings, the Commission’s Proposing Release
140
See rule 30b1-7; see also 2010 Money Market Fund Adopting Release, supra note 84, at 1008210086.
141
See current Form N-MFP Items 34 (requiring disclosure of each designated NRSRO for a
portfolio security and the credit rating given by the designated NRSRO for each portfolio
security); 37b-c (requiring disclosure of each designated NRSRO and the credit rating given by
the designated NRSRO for each portfolio security demand feature); 38b-c (requiring disclosure of
each designated NRSRO and the credit rating given by the designated NRSRO for each portfolio
security guarantee); and 39c-d (requiring disclosure of each designated NRSRO and the credit
rating given by the designated NRSRO for each portfolio security enhancement).
142
Letter to Karrie McMillan, General Counsel, Investment Company Institute from Robert E. Plaze,
Associate Director, Division of Investment Management, SEC (Aug. 19, 2010). Because the
requirements of today’s rule supersede the staff letter, the letter is withdrawn as of the compliance
date of this rule.
37
would have required that each money market fund disclose, for each portfolio security, (i) each
rating assigned by any NRSRO if the fund or its adviser subscribes to that NRSRO’s services, as
well as the name of the agency providing the rating, and (ii) any other NRSRO rating that the
fund’s board of directors (or its delegate) considered in making its minimal credit risk
determination, as well as the name of the agency providing the rating. 143
Most commenters addressing the proposed provision supported the Commission’s
proposal to require disclosure of NRSRO ratings, though many commenters suggested changes,
in particular related to the subscription requirements, as discussed below. 144 As suggested by
commenters, we are not adopting the proposed requirement that a fund disclose the ratings of the
NRSROs to which it subscribes. We are, however, adopting as proposed, a requirement that
funds disclose those NRSRO ratings that the fund’s board of directors (or its delegate)
considered, if any, in making its minimal credit risk determination for a given security, along
with the name of the agency that provided the rating.
1. Use of Subscriptions
Many commenters stated that requiring funds to disclose each rating assigned by any
NRSRO that a fund or its adviser subscribes to would create unnecessary cost burdens for money
market funds, as well as cause other problems. 145 These commenters explained that funds do not
consider every rating of every NRSRO they subscribe to when determining the credit profile of a
143
See proposed Form N-MFP Item C.10. In a conforming change, the proposal would have also
amended Form N-MFP Item C.9 to require disclosure of whether the portfolio security is an
eligible security. We did not receive any comments on this provision. This conforming change is
now adopted in the final rule.
144
See Consumer Federation of America Comment Letter; Better Markets Comment Letter; MFDF
Comment Letter; BlackRock Comment Letter; Schwab Comment Letter.
145
MFDF Comment Letter; BlackRock Comment Letter; ICI Comment Letter; Vanguard Comment
Letter; SIFMA Comment Letter; Fidelity Comment Letter.
38
given security. They stated that subscriptions are often used for many other reasons, such as
evaluating pricing levels, monitoring market activity and context, and assessing other securities.
These commenters also suggested that such disclosures would be unhelpful or even misleading
to investors, since the ratings disclosed would often be unrelated to the determinations of
minimal credit risks. One commenter stated that the required disclosure of every rating of a
portfolio security for which the fund has a subscription would discourage subscriptions, and
potentially interfere with the NRSRO market. 146 Another commenter suggested that any
usefulness of receiving this information on Form N-MFP for purposes of Commission
monitoring was minimal because the information is readily available elsewhere. 147 In addition,
one commenter suggested that NRSROs may decide that inclusion of ratings information on
Form N-MFP constitutes publication of the ratings and therefore assess extra fees associated
with publication. 148 In regard to the general requirement of disclosing any NRSRO ratings on
Form N-MFP, one commenter objected that the proposed provision conflicts with Section 939A
of the Dodd-Frank Act. 149
After considering the comments received, we are persuaded by those commenters who
argued, as discussed above, that requiring disclosure of each rating assigned by any NRSRO if
the fund or its adviser subscribes to that NRSRO’s services, as well as the name of the agency
providing the rating, is unnecessary and potentially misleading. Except as discussed elsewhere
in the section, these commenters did not oppose general disclosure of ratings information on
146
ICI Comment Letter.
147
SIFMA Comment Letter.
148
Schwab Comment Letter.
149
SIFMA Comment Letter.
39
Form N-MFP, provided the requirement is not based on subscribing to an NRSRO’s service. 150
Consequently, the final rule requires that funds disclose on Form N-MFP any NRSRO rating that
the fund’s board of directors (or its delegate) considered in making its minimal credit risk
determination for that particular security, as well as the name of the agency providing the rating.
This requirement will provide meaningful and concise information to investors and the SEC
regarding the process by which a fund evaluates its securities. If a fund’s adviser has considered
more than one NRSRO rating in making a minimal credit risk determination for a particular
portfolio security, the Form N-MFP disclosure will need to reflect each rating considered. We
believe this information on ratings will be useful both to the Commission and to investors to
monitor credit ratings that funds use in evaluating the credit quality of portfolio securities and to
evaluate risks that fund managers take. Moreover, we believe this requirement is consistent with
many funds’ current Form N-MFP disclosure practices. 151 Disclosures of individual portfolio
securities ratings will provide investors, Commission staff, and others with a snapshot of
potential trends in a fund’s overall risk profile, which can in turn impose discipline on the
industry to continually research and evaluate whether that profile is changing.
In regard to the comment that requiring disclosure might trigger the charging of
publication fees by the NRSROs, numerous money market funds currently voluntarily report
ratings on Form N-MFP, and we are not aware of the imposition of such fees on funds. In regard
to the comment suggesting that requiring disclosure of ratings on Form N-MFP conflicts with
Section 939A of the Dodd-Frank Act, we believe that requiring disclosure of the NRSRO ratings
150
Commenters did not specifically object to our proposed disclosure requirement based on a fund
board’s (or its delegate’s) “consideration” of such ratings in making minimal credit risk
determinations.
151
See Proposing Release, supra note 3, at section II.B.
40
considered satisfies the requirements of Section 939A. We do not believe that requiring
disclosure of credit ratings considered by funds as part of their minimal credit risk
determinations conflicts with Section 939A, which requires federal agencies to “remove any
reference to or requirement of reliance on credit ratings….”
2. Other Issues
Some commenters suggested that fund website disclosure of NRSRO ratings would be
more useful and effective than disclosure on Form N-MFP. 152 These commenters stated that such
website disclosure could be made clearer and more understandable for investors than the
proposed disclosure. Although we appreciate the benefits associated with website disclosure, we
expect that the ready public availability of the information on Form N-MFP should achieve many
of the same benefits. We also note that the 2014 money market reforms eliminated the 60-day
delay on public availability of the information filed on Form N-MFP (making such information
public immediately upon filing). Accordingly, we are not adopting a fund website disclosure
requirement for NRSRO ratings at this time. We note, however, that nothing in our final rule
prohibits money market funds from making such disclosure on fund websites.
One commenter suggested another approach that we did not propose, namely that the
Commission require disclosure on Form N-MFP of the factors that a fund considers when
determining whether a security presents minimal credit risks and the details of that
determination. 153 The commenter stated that this expanded disclosure would enhance investors’
and regulators’ understanding of risks in money market fund portfolios. We believe that
expanding disclosures in this way is unlikely to provide additional useful information because all
152
Schwab Comment Letter; ICI Comment Letter; Fidelity Comment Letter.
153
Better Markets Comment Letter.
41
funds will be required to use the codified general factors that we had initially proposed as
guidance. All funds will now have to apply the specific factors the Commission is requiring in
the rule and retain records of the specifics of the determination made for possible review by the
Commission. Although public disclosure of the details of the reasoning behind the funds
evaluation of each factor and overall minimal credit risk determination would provide additional
information to investors, we currently do not believe that many investors would be likely to
benefit from this potentially voluminous disclosure for each security held. Such a disclosure
requirement would also effectively require funds to publicly disclose their entire credit risk
evaluation process, which may include proprietary data. On balance, it is not clear that the
potential benefits of this particular disclosure would justify the potentially significant costs.
Therefore, we are not adopting such a disclosure requirement at this time.
Finally, one commenter stated that government money market funds should not have to
disclose ratings information. 154 We note that no money market funds, including government
money market funds, are required by the final rule to disclose ratings information if that
information is not considered in evaluating a particular security. Accordingly, to the extent that
government money market funds do not consider ratings in selecting portfolio securities, any
burden should be minimal.
3. Technical Amendments
In addition to the substantive amendments to Form N-MFP, the Commission is also
making a technical change to one of the definitions of “money market fund” on Form N-MFP. 155
154
ICI Comment Letter.
155
The definition in the heading of the Instructions did not match the version in the Definitions
section. For consistency and clarity, we are now adopting the heading definition in both places,
as well as on Form N-1A.
42
We are also making a technical change to the definition of “collateralized fully” in rule 2a-7. 156
F. Exclusion from the Issuer Diversification Requirement
We are amending the rule 2a-7 diversification provision as proposed. 157 Under the
current rule, in addition to the provisions regarding credit quality discussed above, rule 2a-7’s
risk limiting conditions require a money market fund’s portfolio to be diversified, both as to the
issuers of the securities it acquires and providers of guarantees (and demand features) 158 related
to those securities. 159 These diversification provisions were designed to diversify the risks to
which money market funds may be exposed and thereby reduce the impact of any single issuer’s
or guarantor’s (or demand feature provider’s) financial distress on a fund. 160 Generally, money
156
See rule 2a-7(a)(5). We are eliminating from the definition of “collateralized fully” in rule 2a7(a)(5) an erroneous cross reference to rule 5b-3(c)(1)(iv)(D) (which has since been removed).
See 2013 Ratings Removal Adopting Release, supra note 5.
157
We are also adopting several technical amendments to the portfolio diversification provisions of
rule 2a-7, as described below in this section.
158
A “demand feature” means a feature permitting the holder of a security to sell the security at an
exercise price equal to the approximate amortized cost of the security plus accrued interest, if
any, at the later of the time of exercise or the settlement of the transaction, paid within 397
calendar days of exercise. Rule 2a-7(a)(9) (definition of demand feature). A “guarantee” as
defined in rule 2a-7 includes an unconditional demand feature. See rule 2a-7(a)(18) (definition of
guarantee). An “unconditional demand feature” means a demand feature that by its terms would
be readily exercisable in the event of a default in payment of principal or interest on the
underlying security or securities. Rule 2a-7(a)(30) (definition of unconditional demand feature).
159
See current rule 2a-7(d)(3). The diversification requirements of rule 2a-7 differ in significant
respects from the requirements for diversified management investment companies under section
5(b)(1) of the Investment Company Act. A money market fund that satisfies the applicable
diversification requirements of paragraphs (d)(3) and (e) of rule 2a-7 is deemed to have satisfied
the requirements of section 5(b)(1). Rule 2a-7(d)(3)(v). Subchapter M of the Internal Revenue
Code contains other diversification requirements for a money market fund to be a “regulated
investment company” for federal income tax purposes. 26 U.S.C. 851 et seq.
160
See Money Market Fund Reform, Investment Company Act Release No 28807 (Jun. 30, 2009)
[74 FR 32688 (Jul. 8, 2009)] (“2009 Money Market Fund Proposing Release”) at n.220 and
accompanying text; Revisions to Rules Regulating Money Market Funds, Investment Company
Act Release No. 17589 (Jul. 17, 1990) [55 FR 30239 (Jul. 25, 1990)], at text accompanying n.23
(“Diversification limits investment risk to a fund by spreading the risk of loss among a number of
securities.”).
43
market funds must today limit their investments in the securities of any one issuer of a first tier
security to no more than 5 percent of total assets, other than with respect to government
securities and securities subject to a guarantee by a non-controlled person. 161 A single state
money market fund, however, may also currently invest up to 25 percent of its total assets in the
securities of any single issuer. 162 In addition to the issuer diversification provisions, money
market funds must generally limit their investments in securities subject to a guarantee (or
demand feature) to no more than 10 percent of total assets from any one provider. 163 A money
market fund is permitted to take on greater indirect exposure to a guarantor because rather than
looking solely to the issuer, the money market fund would have two potential sources of
repayment—the issuer whose securities are subject to the guarantees and the providers of those
guarantees if the issuer defaults. Most recently, the Commission adopted amendments to certain
provisions of these diversification requirements as part of the 2014 money market fund
reforms. 164
161
Current rule 2a-7(d)(3)(i)(A) and (B). A fund also may invest no more than 0.5 percent of fund
assets in any one issuer of a second tier security. Current rule 2a-7(d)(3)(i)(C). The rule provides
a safe harbor under which a taxable or national tax-exempt fund may invest up to 25 percent of its
total assets in the first tier securities of a single issuer for a period of up to three business days
after acquisition (but a fund may use this exception for only one issuer at a time). Current rule
2a-7(d)(3)(i)(A). Because the amendments we are adopting today eliminate the distinction
between first and second tier securities, the issuer diversification requirements and the safe
harbor, as amended, will not refer to or rely on a portfolio security’s rating.
162
Current rule 2a-7(d)(3)(i)(B).
163
Rule 2a-7 also provides a “fifteen percent basket” for tax-exempt (including single state) money
market funds, under which as much as 15 percent of the value of securities held in a tax-exempt
fund’s portfolio may be subject to guarantees or demand features from a single institution. See
rule 2a-7(d)(3)(iii)(B). The tax-exempt fund, however, may only use the 15 percent basket to
invest in demand features or guarantees issued by non-controlled persons that are first tier
securities. See rule 2a-7(d)(3)(iii). Under the amendments we are adopting today, the 15 percent
basket will be available with respect to any demand feature or guarantee issued by a noncontrolled person without regard to the rating of the security, guarantee or demand feature.
164
See 2014 Money Market Fund Adopting Release, supra note 6. Among other things, the 2014
money market fund amendments require that money market funds treat certain entities that are
44
Notwithstanding the 5 percent issuer diversification provision, rule 2a-7 currently does
not require a money market fund to be diversified with respect to issuers of securities that are
subject to a guarantee by a non-controlled person. 165 This exclusion could allow, for example, a
fund to invest a significant portion or all of the value of its portfolio in securities issued by the
same entity if the securities were guaranteed by different non-controlled person guarantors and
none of the guaranteed securities had a value exceeding 10 percent of the fund’s total assets. We
continue to be concerned that a fund that relies on this issuer diversification exclusion could have
a highly concentrated portfolio and would be subject to substantial risk if the single issuer in
whose securities it had such a significant investment were to come under stress or default.
The diversification amendments that we adopt today will remove the current exclusion to
the issuer diversification requirement for securities subject to a guarantee issued by a noncontrolled person. That is, under today’s amendment, each money market fund that invests in
securities subject to a guarantee (whether or not the guarantor is a non-controlled person) will
have to comply with both the 10 percent diversification requirement for the guarantor as well as
the 5 percent diversification requirement for the issuer. 166
affiliated with each other as single issuers when applying the 5 percent issuer diversification
provision of rule 2a-7 and treat the sponsors of asset-backed securities as guarantors subject to the
10 percent diversification provision of rule 2a-7 applicable to guarantees and demand features,
unless the fund’s board makes certain findings. These amendments were intended to increase the
resiliency of and reduce risk in money market funds by limiting their ability to concentrate
investments in a single economic enterprise.
165
See current rule 2a-7(d)(3). A guarantee issued by a non-controlled person means a guarantee
issued by a person that, directly or indirectly, does not control, and is not controlled by or under
common control with the issuer of the security subject to the guarantee (control means “control”
as defined in section 2(a)(9) of the Act) (15 U.S.C. 80a-2(a)(9)), or a sponsor of a special purpose
entity (“SPE”) with respect to an asset-backed security. Rule 2a-7(a)(17).
166
But see rule 2a-7(e). If the fund’s board of directors has determined that the fund is not relying
on a guarantee to determine the quality, maturity or liquidity of a portfolio security and maintains
a record of this determination, then the fund need not comply with the 10 percent guarantor
diversification requirement with respect to such guarantee.
45
One commenter supported the proposed issuer diversification amendment. 167 Another
commenter did not specifically oppose the proposal but questioned the additive value of the
proposed amendment. 168 The majority of commenters, however, that discussed the
diversification proposal opposed it, for a variety of reasons as further discussed below. 169
1. Credit Quality of the Guarantor and Two Sources of Repayment
In cases where a money market fund invests in a security subject to a guarantee, the
guarantor assumes the credit risks presented by a particular issuer by agreeing to provide
principal and interest payments in the event the issuer of the underlying security is unable to do
so. Accordingly, rule 2a-7 allows a money market fund to look to the credit quality of the
guarantor as opposed to the issuer to meet rule 2a-7’s portfolio quality provisions. 170 Several
commenters emphasized a money market fund’s ability to rely on the credit quality of the
guarantor in this case, arguing that it is appropriate to direct the minimal credit risk
determination to the guarantor as opposed to refocusing the analysis on issuer concentration
risk. 171 One of these commenters also suggested that securities subject to a guarantee in many
cases trade on the basis of the credit quality of the provider of that guarantee, and thus exposure
to the underlying security issuer may not be relevant to a money market fund’s ability to
167
See Better Markets Comment Letter. This commenter also opined that there was no rationale for
setting a more generous limit for guarantors of the securities than for issuers and that accordingly,
the Commission should strengthen the diversification requirements by preventing any one
guarantor from guaranteeing more than 5 percent of a fund’s assets as opposed to 10 percent.
168
See Schwab Comment Letter.
169
See BlackRock Comment Letter; Dreyfus Comment Letter; ICI Comment Letter; SFIG Comment
Letter; SIFMA Comment Letter; Vanguard Comment Letter.
170
See rule 2a-7(d)(2)(iii).
171
See Dreyfus Comment Letter; Schwab Comment Letter; SIFMA Comment Letter.
46
maintain a stable net asset value in these cases. 172 Another commenter suggested that complying
with the proposed requirement for guaranteed securities could be construed to require the
manager to also conduct a credit review and on-going monitoring of the issuer. 173 We are not
amending the provision in rule 2a-7 that permits money market funds to look to the credit quality
of the guarantor as opposed to the issuer to meet rule 2a-7’s portfolio quality provisions.
As we discussed in the Proposing Release, by permitting money market funds a higher
10 percent limit on their indirect exposures to a single provider of a guarantee than the 5 percent
limit on direct investments in any one issuer, rule 2a-7 permits a money market fund to take on
greater indirect exposures to providers of guarantees. As we previously discussed, and as
acknowledged by commenters, a money market fund is permitted to take on greater indirect
exposure because, rather than looking solely to the issuer, the money market fund would have
two potential sources of repayment—the issuer whose securities are subject to the guarantees and
the providers of those guarantees if the issuer defaults. 174 Both the issuer and the guarantor
would have to default at the same time for the money market fund to suffer a loss. And if a
guarantor were to come under stress, the issuer may be able to obtain a replacement. 175
By diversifying solely against the guarantor, as is the case under the current issuer
diversification exclusion, a fund could rely on the guarantors’ credit quality or repayment ability,
not the issuer’s. Thus, in addition to looking to the credit quality of the guarantor as opposed to
172
See SIFMA Comment Letter.
173
See Schwab Comment Letter.
174
See BlackRock Comment Letter; SFIG Comment Letter.
175
See, e.g., Revisions to Rules Regulating Money Market Funds, Investment Company Act Release
No.19959 (Dec. 17, 1993) [58 FR 68585 (Dec. 28, 1993)] at n.83 and accompanying text
(observing that, if the guarantor of one of the money market fund’s securities comes under stress,
“issuers or investors generally can either put the instrument back on short notice or persuade the
issuer to obtain a substitute for the downgraded institution”).
47
the issuer to meet rule 2a-7’s portfolio quality provisions, the fund would also effectively
substitute the credit of the guarantor for that of the issuer for diversification purposes, without
imposing the tighter 5 percent requirement that rule 2a-7 generally applies for issuer
diversification. This means that a fund could have a highly concentrated portfolio and could be
subject to substantial risk if it has a significant investment in securities of a single issuer, and
such issuer were to come under stress or default. As we stated in the Proposing Release, we are
concerned that a money market fund relying on the exclusion from the issuer diversification
provision need only comply with the 10 percent guarantor diversification requirement,
notwithstanding the credit substitution discussed above. In consideration of our reform goal of
limiting concentrated exposure of money market funds to particular economic enterprises, we
continue to believe that ignoring a fund’s exposure to the issuer in these circumstances is not
appropriate. 176
In the Proposing Release, we requested comment as to whether commenters agreed with
our proposed approach to treat securities subject to a guarantee by a non-controlled person
similar to other securities with a guarantee under rule 2a-7, or whether we should instead require
that a guarantor be treated as the issuer and subject to a 5 percent diversification requirement
when a money market fund is relying exclusively on the credit quality of the guarantor or when
the security need not meet the issuer diversification requirements. We also asked in the 2013
Money Market Fund Proposing Release more generally whether we should continue to
distinguish between a fund’s exposure to guarantors and issuers by providing different
176
See 2014 Money Market Fund Adopting Release, supra note 6, at text following n.1600 and
accompanying n.1601. The exclusion from the 5 percent issuer diversification requirement for
certain guaranteed securities was adopted in the 1996 money market fund amendments to provide
flexibility in municipal investments, and was premised on the ability of a money market fund to
rely on the guarantee if an issuer became distressed. See 1996 Money Market Fund Adopting
Release, supra note 84.
48
diversification requirements for these exposures. 177 We explained that rule 2a-7 permits a
money market fund, when determining if a security subject to a guarantee satisfies the credit
quality standards, to rely exclusively on the credit quality of the guarantor. 178 As in the
Proposing Release, we also specifically asked whether the guarantor should be treated as the
issuer and subject to a 5 percent diversification requirement whenever the money market fund is
relying exclusively on the credit quality of the guarantor. Although most commenters did not
specifically address this issue, one commenter argued that guarantors and demand feature
providers should generally be subject to the same 5 percent issuer diversification requirements
instead of a higher 10 percent limit. 179 We continue to believe, however, that the approach we
are adopting today is preferable to making both the guarantor and issuer subject to a 5 percent
diversification requirement because, among other things, the approach we are adopting today
would treat securities subject to a guarantee by a non-controlled person similarly to other
securities with a guarantee under rule 2a-7.
As discussed further in the economic analysis section below, we believe that the potential
costs of requiring both the guarantor and issuer to be subject to a 5 percent diversification
requirement would likely be more significant than the costs of the amendment we are adopting
today. As of the end of April 2015, we estimate that approximately 110 (of 214) prime money
market funds had total exposure to a single entity (including directly issued, asset-backed
177
See 2013 Money Market Fund Proposing Release, supra note 16, at sections III.J.1 – 2.
178
Rule 2a-7(d)(2)(iii). As noted above, a money market fund is permitted to take on greater indirect
exposure because the fund has two potential sources of repayment. However, the fact that a
money market fund has both the issuer and guarantor as sources of repayment may not fully
reduce the risks of the investment in all cases because in the event that both the issuer and
guarantor default at the same time the fund could suffer a loss. Additionally, the issuer of the
guaranteed securities need not satisfy rule 2a-7’s credit quality requirements.
179
See Better Markets Comment Letter.
49
commercial paper sponsorship, and provision of guarantees and demand features) in excess of 5
percent. If we adopted an amendment that both the guarantor and issuer are subject to a 5
percent diversification requirement, any fund that had exposure to an entity greater than 5
percent when those assets matured would have to reinvest the proceeds of the securities creating
that exposure in different securities or securities with a different guarantor. Those changes may
or may not require those funds to invest in alternative securities, and those securities might
present greater risk if they offered lower yields, lower liquidity, or lower credit quality. In
addition, we believe the approach we take today is preferable to making both the guarantor and
issuer subject to a 5 percent diversification requirement because unlike a security that is not
subject to a guarantee, a security that is subject to a guarantee would continue to have two
sources of repayment.
Another commenter stated that the Commission has provided for the higher 10 percent
limit on indirect exposure of money market funds to guarantors in part because of the “doublebarreled” protection, as discussed above, and suggested that the same logic should apply in
imposing an issuer diversification limit on guaranteed securities. 180 This commenter
recommended that a 10 percent issuer diversification limit be applied under the rule for securities
of an issuer that are guaranteed by a non-controlled person. 181 Rather than subject these issuers
to a unique 10 percent requirement, however, we continue to believe that a better approach
would be to restrict risk exposures to all issuers of securities subject to a guarantee or demand
feature under rule 2a-7 in the same way. As noted above, a money market fund is permitted to
take on greater exposure to guarantees because rather than solely looking to the issuer, the
180
See SFIG Comment Letter.
181
See id.
50
money market fund would have two sources of repayment. We believe that this rationale applies
to all securities equally (whether the security is subject to a guarantee by a controlled person or a
non-controlled person), and that if a money market fund is permitted to take on a greater
exposure to a guarantor, then it must also comply with the underlying 5 percent issuer
diversification provision. Therefore, under today’s amendments, each money market fund that
invests in securities subject to a guarantee (whether or not the guarantor is a non-controlled
person) will have to comply with both the 10 percent diversification requirement for the
guarantor as well as the 5 percent diversification requirement for the issuer. As a result, except
for the special provisions regarding single state money market funds, no money market fund
non-government portfolio security would be excluded from rule 2a-7’s limits on issuer
concentration. 182
2. Tax-Exempt Funds
Several commenters argued that the proposed issuer diversification amendment should
not be applied to tax-exempt money market funds in particular. 183 A couple of these commenters
stated that the Commission has previously recognized that tax-exempt money market funds
should have unique treatment in certain instances due to the particular characteristics of taxexempt money market funds, including the more constrained supply of investable securities as
opposed to other types of money market funds. 184 Several commenters argued that removing the
issuer diversification exclusion would cause greater supply challenges, particularly in the tax-
182
See rule 2a-7(d)(3)(i)(B) (issuer diversification requirements for single state money market
funds).
183
See Dreyfus Comment Letter; Fidelity Comment Letter; ICI Comment Letter.
184
See ICI Comment Letter; Fidelity Comment Letter.
51
exempt market. 185 One of these commenters stated that the proposed amendment would be
particularly difficult for single state money market funds due to the limited supply of eligible
securities, but these commenters did not acknowledge that the 5 percent issuer diversification
limit for single state funds applies to only 75 percent of a single state fund’s total assets. 186
Another commenter stated that the proposal assumes a ready supply of securities supported by
the same guarantor with different issuers so that a fund could comply with the issuer
diversification requirement without reducing its holdings of the guarantor’s securities, but that
this is not the case, particularly in the tax-exempt market. 187
One commenter suggested that tax-exempt money market funds regularly rely on the
exclusion for securities guaranteed by non-controlled persons to exceed the 5 percent
diversification limit. 188 In the Proposing Release, staff believed that based on an analysis of
February 2014 Form N-MFP data, only 8 out of 559 money market funds, the majority of which
were tax-exempt money market funds, held securities with a guarantee issued by a noncontrolled person that exceeded the 5 percent diversification requirement for issuers. A couple
commenters suggested that Commission staff review a broader sample of data from Form NMFP to determine the magnitude of funds that rely on the issuer diversification exclusion. 189
One of these commenters also suggested that Commission staff confirm that for any given fund
the staff are aggregating an issuer’s securities subject to guarantees by non-controlled persons
with the issuer’s securities subject to guarantees by control persons and the issuer’s securities
185
See Dreyfus Comment Letter; Fidelity Comment Letter; ICI Comment Letter.
186
See Dreyfus Comment Letter. See also rule 2a-7(d)(3)(i)(B).
187
See ICI Comment Letter.
188
See id.
189
See Dreyfus Comment Letter; ICI Comment Letter.
52
that are not guaranteed, in order to determine whether a fund is potentially relying on the issuer
diversification exclusion by exceeding the 5 percent issuer diversification limit. 190
In order to obtain a greater sample, and in response to commenters, the staff
supplemented its analysis using October 2014 and April 2015 Form N-MFP data to review the
number of funds that exceeded the 5 percent issuer diversification limit, which would indicate
that such funds were potentially relying on the 5 percent issuer diversification exclusion. 191 As
discussed further in the economic analysis section below, the staff’s analysis shows that for
October 2014, 60 money market funds out of 553 total money market funds, or approximately
10.8 percent of all money market funds, were potentially relying on the 5 percent issuer
diversification exclusion. In addition, staff analysis shows that as of October 2014, only 0.0482
percent of total money market fund assets were above the 5 percent issuer diversification
threshold. 192 For April 2015, staff analysis shows that 63 money market funds out of 542 total
money market funds, or approximately 11.6 percent of all money market funds, were potentially
relying on the 5 percent issuer diversification exclusion. In addition, staff analysis shows that as
of April 2015, only 0.0624 percent of total money market fund assets were above the 5 percent
issuer diversification threshold. 193
Based on their updated analysis, Commission staff believes that only tax-exempt money
190
See ICI Comment Letter.
191
In calculating funds’ issuer concentrations, staff made assumptions about the relationships among
issuers. Such assumptions may have caused the number of funds that appear to be relying on the
5 percent issuer diversification exclusion to be overstated. To be conservative, staff assumed, for
example, that a position in a tender option bond that is over 5 percent of the fund’s assets is
exposure to a single issuer, even though tender option bond trusts may have more than one issuer
as the underlying obligor. We expect that funds’ analysts, portfolio managers and counsel can
make these determinations based on specific facts that were not available to the staff.
192
This percentage amount corresponds to $1,447,300,000 in assets.
193
This percentage amount corresponds to $1,833,000,000 in assets.
53
market funds appeared to be relying on the 5 percent issuer diversification exclusion. For
October 2014, staff analysis shows that 16 national tax-exempt money market funds out of 72
total national tax-exempt money market funds were potentially relying on the 5 percent issuer
diversification exclusion. In addition, staff analysis shows that as of October 2014, only 0.1
percent of national tax-exempt money market fund assets were above the 5 percent issuer
diversification threshold. 194 For April 2015, staff analysis shows that 25 national tax-exempt
money market funds out of 71 total national tax-exempt money market funds were potentially
relying on the 5 percent issuer diversification exclusion. In addition, staff analysis shows that as
of April 2015, only 0.5 percent of national tax-exempt money market fund assets were above the
5 percent issuer diversification threshold. 195
One commenter argued that the proposed amendment would particularly affect single
state money market funds. 196 In response to this commenter, and because a single state fund may
currently invest up to 25 percent of its total assets in the first tier securities of any single issuer,
Commission staff also separately identified the number of single state money market funds that
appear to be relying on the issuer diversification exclusion. For October 2014, staff analysis
shows that 44 single state money market funds out of 97 total single state money market funds
were potentially relying on the 5 percent issuer diversification exclusion. In addition, staff
analysis shows that as of October 2014, only 1.7 percent of single state money market fund
assets were above the 5 percent issuer diversification threshold (while taking into account the 25
194
This percentage amount corresponds to $198,500,000 in assets.
195
This percentage amount corresponds to $893,400,000 in assets.
196
See Dreyfus Comment Letter.
54
percent issuer diversification basket). 197 For April 2015, staff analysis shows that 38 single state
money market funds out of 90 total single state money market funds were potentially relying on
the 5 percent issuer diversification exclusion. In addition, staff analysis shows that as of April
2015, only 1.3 percent of single state money market fund assets were above the 5 percent issuer
diversification threshold (while taking into account the 25 percent issuer diversification
basket). 198
These updated analyses confirm the Commission’s initial assumption that overall, few
money market funds would be affected by the issuer diversification amendment. As indicated by
the staff’s analysis above, and as discussed further in the economic analysis section below, we
continue to believe a small number of all money market funds rely on the 5 percent issuer
diversification exclusion and therefore believe the amendment’s effect on funds, including the
available supply of investable securities, would be minimal. We recognize that although overall
few money market funds are relying on the 5 percent issuer exclusion, the amendment to remove
such exclusion would disproportionately affect tax-exempt money market funds and single state
money market funds. However, we believe that our staff’s analysis of the percentage of assets in
excess of the 5 percent issuer diversification threshold provides an accurate reflection of the
potential impact that the elimination of the 5 percent issuer diversification exclusion would have
on money market funds. We also believe that looking to the percentage of assets in addition to
the number of funds (which shows only absolute numbers), comprehensively shows the
corresponding level of assets that will need to be reinvested. The above data shows that for
October 2014 and April 2015, approximately 99.95 percent and 99.94 percent, respectively, of
197
This percentage amount corresponds to $1,248,800,000 in assets.
198
This percentage amount corresponds to $939,600,000 in assets.
55
total money market fund assets are not above the 5 percent issuer diversification threshold.
Thus, because most money market funds are not using the exclusion and because a very high
percentage of money market fund assets are not above the threshold, we continue to believe any
negative effects for money market funds will generally be minimal.
We also note that money market funds will not be required to sell any of their portfolio
securities as a result of our diversification amendment because rule 2a-7’s diversification limits
are measured at acquisition, and they may therefore retain these assets until they mature.
Although we understand that national tax-exempt money market funds and single state money
market funds may have made greater use of the 5 percent issuer exclusion in the past (and might
do so in the future if we retained the 5 percent issuer diversification exclusion), we remain
concerned that funds were previously exposed to concentrated risks inconsistent with the
purposes of rule 2a-7’s diversification requirements. As discussed above, we also continue to
believe that restricting risk exposures to all issuers of securities subject to a guarantee or demand
feature in the same way will appropriately limit the concentration of exposure that a money
market fund could otherwise have to a particular issuer. Accordingly, we continue to believe
that removing the exclusion to the 5 percent issuer diversification provision furthers our reform
goal of limiting concentrated exposure of money market funds to particular economic
enterprises.
3. Technical Amendments
The Commission is also making technical amendments to certain diversification
provisions in rule 2a-7. 199 First, the Commission is amending rule 2a-7(d)(3)(i)(A)(2) to clarify
199
See rule 2a-7(d)(3)(i) (issuer diversification) and rule 2a-7(d)(3)(iii) (diversification rules for
demand features and guarantees).
56
that a tax-exempt fund (other than a single state fund) is required to comply with rule 2a7(d)(3)(i)(A)(2) with respect to only 85 percent of its total assets. 200
Second, the Commission is clarifying the use of the three-day safe harbor as it pertains to
issuer diversification. The current three-day safe harbor provides that a money market fund may
invest up to 25 percent of its total assets in first tier securities of a single issuer for a period of
three business days after the acquisition thereof. 201 Specifically, rule 2a-7(d)(3)(i)(A)(1)
generally prohibits a money market fund (other than a single state fund) from investing more
than 5 percent of its total assets in an issuer’s first tier securities, provided that such a fund may
invest up to 25 percent of its total assets in the first tier securities of a single issuer for a period of
up to three business days after the acquisition thereof. In addition, rule 2a-7(d)(3)(i)(A)(2)
prohibits, at the time of any acquisition, investment of more than ten percent of a money market
fund’s total assets in securities issued by or subject to demand features or guarantees from the
institution that issued the demand feature or guarantee, without making reference to the three-day
safe harbor. Because the three-day safe harbor is referenced solely in subparagraph (1) of rule
2a-7(d)(3)(i)(A) and not in subparagraph (2) of rule 2a-7(d)(3)(i)(A), it may have been unclear as
to whether a money market fund (other than a single state fund) could invest up to 25 percent of
its total assets in a single issuer’s securities for a period of up to three business days if some of
200
See rule 2a-7(d)(3)(i)(A)(2). Current rule 2a-7(d)(3)(i)(A)(2) could be read to suggest that a taxexempt money market fund must not invest more than 10 percent of its total assets in securities
issued by or subject to demand features or guarantees from the institution that issued the demand
feature or guarantee. However, the 2014 money market fund reform amendments provided that
as much as 15 percent of the value of securities held in a tax-exempt money market fund’s
portfolio may be subject to guarantees or demand features from a single institution. The technical
amendment incorporates and reflects these 2014 money market fund reform amendments and
clarifies that a tax-exempt fund need only comply with this provision with respect to 85 percent
of its total assets, and not with respect to all of its total assets.
201
See supra note 161. In the amendments we are adopting today, the three-day safe harbor will not
refer to investments in first-tier securities.
57
the money market fund’s securities were subject to guarantees or demand features provided by
such issuer. In order to clarify that a money market fund (other than a single state fund) can
invest up to 25 percent of its total assets in a single issuer’s securities for a period of up to three
business days if some of the money market fund’s securities are subject to guarantees or demand
features provided by such issuer, the Commission is amending rule 2a-7(d)(3)(i)(A) to clarify
that the three-day safe harbor for issuer diversification should be read to apply to both
subparagraphs (1) and (2). 202
Last, the Commission is amending rule 2a-7(d)(3)(i)(B)(2) to clarify that a single state
fund is required to comply with the diversification limitations of rule 2a-7(d)(3)(i)(B)(2) with
respect to only 75 percent of its total assets, so long as not more than 15 percent of its total assets
are invested in securities subject to guarantees or demand features provided by an institution as
provided for in rule 2a-7(d)(iii)(B). 203 These amendments are intended only to clarify the
diversification amendments that the Commission adopted as part of the 2014 money market
reform.
III.
COMPLIANCE PERIOD FOR THE FINAL RULE AND FORM AMENDMENTS
In the Proposing Release, we proposed a compliance date for the final amendments to
rule 2a-7 and Form N-MFP that would coordinate compliance with the rule 2a-7 amendments
202
See rule 2a-7(d)(3)(i)(A).
203
See rule 2a-7(d)(3)(i)(B)(2). Current rule 2a-7(d)(3)(i)(B)(2) could be read to suggest that a
single state fund must not invest more than 10 percent of its total assets in securities issued by or subject
to demand features or guarantees from the institution that issued the demand feature or guarantee.
However, a single state fund may invest up to 25 percent of its total assets in securities of any single
issuer. In addition, the 2014 money market fund reform amendments provided that as much as 15 percent
of the value of securities held in a single state fund’s portfolio may be subject to guarantees or demand
features from a single institution. The technical amendment incorporates and reflects these provisions
and clarifies that a single state fund need only comply with this provision with respect to 75 percent of its
total assets, and not with respect to all of its total assets.
58
relating to diversification, stress testing, and Form N-MFP, adopted in the 2014 Money Market
Fund Adopting Release. We solicited comments on this compliance period in the Proposing
Release, and one commenter addressed the issue, suggesting that the date be pushed back so that
funds will have at least one full year to comply. 204
In response to this comment, we are now adopting October 14, 2016 as the compliance
date for this final rule. This date will give funds more than a full year to comply, which we agree
is appropriate, and will also coordinate with the floating net asset value, liquidity fee, and
redemption gate provisions in the 2014 Money Market Fund Adopting Release. We believe that
this compliance date will provide an adequate period of time for money market funds to review
and revise their policies and procedures for complying with amended rule 2a-7. 205 Although this
compliance date will not coincide with the compliance date for the rule 2a-7 amendments
relating to diversification, stress testing, and Form N-MFP adopted in the 2014 Money Market
Fund Adopting Release, we believe that coordinating the compliance date of today’s
amendments with the compliance date of the floating net asset value amendments adopted in the
2014 Money Market Fund Adopting Release should reduce costs by consolidating changes to be
made to a fund’s policies and procedures at that time, while also providing more than a year for
implementation of today’s amendments.
IV.
PAPERWORK REDUCTION ACT ANALYSIS
Certain provisions of this final rule contain “collections of information” within the
meaning of the Paperwork Reduction Act of 1995 (“PRA”). 206 An agency may not conduct or
sponsor, and a person is not required to respond to, a collection of information unless it displays
204
Schwab Comment Letter.
205
See infra section V.A.2.v.
206
44 U.S.C. 3501-3520.
59
a currently valid control number. The titles and control numbers for the existing collections of
information that are affected by the rule amendments are: (1) “Rule 2a-7 under the Investment
Company Act of 1940, Money market funds” (OMB Control No. 3235-0268); (2) “Rule 30b1-7
under the Investment Company Act of 1940, Monthly report for money market funds” (OMB
Control No. 3235-0657); and (3) “Form N-MFP under the Investment Company Act of 1940,
Monthly schedule of portfolio holdings of money market funds” (OMB Control No. 3235-0657).
This final rule contains no new collections of information not present in the proposed rule. The
Commission published notice soliciting comments on the collection of information requirements
in the Proposing Release and submitted the proposed collections of information to the Office of
Management and Budget (“OMB”) for review in accordance with 44 U.S.C. 3507(d) and 5 CFR
1320.11. We did not receive any comments on the collection of information requirements.
A.
Rule 2a-7
As discussed above, we are removing references to credit ratings in rule 2a-7, which
affect five elements of the rule: (i) determination of whether a security is an eligible security; (ii)
determination of whether a security is a first tier security; (iii) credit quality standards for
securities with a conditional demand feature; (iv) requirements for monitoring securities for
ratings downgrades and other credit events; and (v) stress testing. These amendments involve
collections of information, and the respondents to the collections of information are money
market funds. This collection of information will be mandatory for money market funds that rely
on rule 2a-7, and to the extent that the Commission receives confidential information pursuant to
the collection of information, such information will be kept confidential, subject to the
provisions of applicable law. 207
207
See, e.g., 5 U.S.C. 552 (Exemption 4 of the Freedom of Information Act provides an exemption
60
1. Eligible Security Determinations for Money Market Fund Portfolio Securities,
Including Securities That Are Subject to a Conditional Demand Feature
Rule 2a-7 limits a money market fund’s portfolio investments to “eligible securities,”
which are currently defined as securities that have received credit ratings from a requisite
NRSRO in one of the two highest short-term rating categories, or comparable unrated
securities. 208 The rule also restricts money market fund investments to securities that the fund’s
board, or its delegate, determines present minimal credit risks, and requires a fund to adopt
policies and procedures regarding minimal credit risk determinations. 209 As discussed above, we
are adopting amendments to rule 2a-7 that will remove any reference to, or requirement of
reliance on, credit ratings in rule 2a-7 and modify the credit quality standard to be used in
determining the eligibility of a money market fund’s portfolio securities, including securities that
are subject to a conditional demand feature. Specifically, the amendments will eliminate the
current requirement that an eligible security be rated in one of the two highest short-term rating
categories by an NRSRO or be of comparable quality, and will combine the current “first tier”
and “second tier” credit risk categories into a single standard, which will be included as part of
rule 2a-7’s definition of eligible security. A security will be an eligible security only if the
money market fund’s board of directors (or its delegate) determines that it presents minimal
credit risks, which determination will involve consideration of specified credit analysis factors
for “trade secrets and commercial or financial information obtained from a person and privileged
or confidential.” 5 U.S.C. 552(b)(4). Exemption 8 of the Freedom of Information Act provides an
exemption for matters that are “contained in or related to examination, operating, or condition
reports prepared by, or on behalf of, or for the use of an agency responsible for the regulation or
supervision of financial institutions.” 5 U.S.C. 552(b)(8)).
208
See current rule 2a-7(a)(12).
209
See rules 2a-7(d)(2)(i); 2a-7(j)(1); 38a-1.
61
that are listed in the rule. 210 The amendments also require that, with respect to a security (or its
guarantee) subject to a conditional demand feature, the underlying security (or its guarantee)
must meet the same minimal credit risks standard. 211
Money market funds are required to have written policies and procedures regarding
minimal credit risk determinations. 212 Thus, each money market fund complex will incur
one-time costs to comply with these amendments. Specifically, each fund complex will incur
costs to review the amended provisions of rule 2a-7 and, as it determines appropriate in light of
the amendments, revise its policies and procedures to incorporate the amended credit quality
standards to be used in determining the eligibility of a money market fund’s portfolio securities.
As discussed below, we anticipate that many funds are likely to retain their investment policies
as currently required under rule 2a-7, which incorporate NRSRO ratings and which will be
permitted under the rule amendments. 213 Some funds, on the other hand, may choose to revise
their investment policies to remove references to NRSRO ratings and to incorporate the
standards provided in the rule. Even if funds choose to eliminate references to ratings in their
investment policies, funds’ investment policies may not change substantially, as funds are
already required to assess credit quality apart from ratings as part of their minimal credit risk
210
Rule 2a-7(a)(11); see supra section II.A.
211
Rule 2a-7(d)(2)(iii)(C); see supra section II.B. The proposal included a further finding that the
issuer of the demand feature would have a very strong capacity for payment of its financial
commitments. See proposed rule 2a-7(d)(2)(iii)(C). As discussed below, because the minimal
credit risk standard, as proposed, remains in the amendments we are adopting today, and, because
the strong capacity standard, as commenters noted, would be generally superfluous and subsumed
by the overriding minimal credit risk determination, we are not revising our burden estimate from
the proposal.
212
See rule 2a-7(j)(1).
213
See infra section V.A.
62
determinations. 214 As we noted in the discussion above, based on staff observations in
examinations and prior staff guidance, we believe that most money market fund managers
currently take the codified credit analysis factors into account, as appropriate, when they
determine that a portfolio security presents minimal credit risks.
The Proposing Release provided the credit analysis factors as guidance, rather than in
rule text, and required that the fund make a finding that the issuer of a security had an
“exceptionally strong capacity” to meet its short-term financial obligations. 215 Because the final
rule is merely codifying the analysis that staff believes money market fund managers currently
take into account, we do not believe that the burden associated with the final rule will be
different from that estimated for the proposed rule. The estimates associated with the analysis
for the proposal assumed use of the credit analysis factors presented as guidance, thus providing
the fund sufficient information to make the minimal credit risk and “exceptionally strong
capacity” findings. Therefore, we believe that codifying the factors and eliminating the
“exceptionally strong capacity” finding will have no effect on the burden estimates, because use
of the factors was already assumed in those estimates and the “exceptionally strong capacity”
finding was assumed to be built into that analysis, creating no additional burden. Similarly, the
proposal included a further finding that the issuer of a conditional demand feature would have a
“very strong capacity” for payment of its financial commitments. 216 As with the “exceptionally
strong capacity” finding, this “very strong capacity” finding was assumed to be built into the
credit analysis, and we do not believe that removal of this finding will change the estimated
214
See current rule 2a-7(d)(2)(i).
215
See proposed rule 2a-7(a)(11).
216
See proposed rule 2a-7(d)(2)(iii)(C).
63
burden associated with this requirement.
While we cannot predict with precision the extent to which funds may revise their
policies and procedures for determining minimal credit risk, we estimate that each money market
fund complex on average will incur a one-time burden of 9 hours, 217 at a cost of $2,838, 218 to
review and revise, as appropriate, its policies and procedures. Using an estimate of 103 money
market fund complexes, 219 we estimate that money market funds would incur, in aggregate, a
total one-time burden of 927 hours, 220 at a cost of $292,314, 221 to comply with the amended
provisions of rule 2a-7 modifying the credit quality standard to be used in determining the
eligibility of a fund’s portfolio securities. Amortizing these hourly and cost burdens over three
years results in an average annual increased burden for all money market fund complexes of 309
217
We estimate that the lower range of the one-time hour burden for a money market fund complex
to review and revise, as appropriate, its policies and procedures for determining minimal credit
risk would be 6 hours (4 hours by a compliance manager, and 2 hours by an attorney). We
estimate that the upper range of the one-time hour burden for a money market fund complex to
review and revise, as appropriate, its policies and procedures for determining minimal credit risk
would be 12 hours (8 hours by a compliance manager, and 4 hours by an attorney). For purposes
of our estimates for the PRA analysis, we have taken the mid-point of this range (mid-point of 6
hours and 12 hours = 9 hours (6 hours by a compliance manager, and 3 hours by an attorney)).
218
This estimate is based on the following calculation: (6 hours (mid-point of 4 hours and 8 hours
incurred by a compliance manager) x $283 (rate for a compliance manager) = $1,698) + (3 hours
(mid-point of 2 hours and 4 hours incurred by an attorney) x $380 (rate for an attorney) = $1,140)
= $2,838. All estimated wage figures discussed here and throughout this release are based on
published rates that have been taken from SIFMA’s Management & Professional Earnings in the
Securities Industry 2013, available at http://www.sifma.org/research/item.aspx?id=8589940603,
modified by Commission staff to account for an 1800 hour work-year and multiplied by 5.35 to
account for bonuses, firm size, employee benefits, and overhead.
219
Based on data from Form N-MFP and iMoneyNet as of April 30, 2015. The Proposing Release
PRA statement was based on data as of February 28, 2014. We have updated the estimates used
in this final PRA to reflect more current data as of April 30, 2015.
220
This estimate is based on the following calculation: 9 hours x 103 money market fund
complexes = 927 hours.
221
This estimate is based on the following calculation: $2,838 x 103 money market fund
complexes = $292,314.
64
hours 222 at a cost of $97,438. 223 We do not believe that funds would newly implement or change
any annual review of policies and procedures that they currently perform as a result of the
adopted amendments. There will be no external costs associated with this collection of
information.
2. Monitoring Minimal Credit Risks
Rule 2a-7 currently requires a money market fund board (or its delegate) to promptly
reassess whether a security that has been downgraded by an NRSRO continues to present
minimal credit risks. 224 As discussed above, we are adopting as proposed amendments to rule 2a7 that will eliminate the current use of credit ratings in the rule’s downgrade and default
provisions. Rule 2a-7 instead will require a money market fund to adopt written procedures
requiring the fund adviser, or any person to whom the fund’s board of directors has delegated
portfolio management responsibilities, to provide ongoing review of each portfolio security to
determine that the issuer continues to present minimal credit risks. 225 To comply with these
amendments, a fund complex will incur one-time costs to review the amended provisions of rule
2a-7 and adopt policies and procedures providing for ongoing review to determine whether a
money market fund’s portfolio securities continue to present minimal credit risks. Money
market funds are not currently required to maintain policies and procedures that specifically
address ongoing minimal credit risk monitoring. Although we understand, based on staff
experience, that most money market funds currently monitor portfolio securities for minimal
222
This estimate is based on the following calculation: 927 hours ÷ 3 years = 309 hours.
223
This estimate is based on the following calculation: $292,314 ÷ 3 years = $97,438.
224
See current rule 2a-7(f)(1)(i).
225
Rule 2a-7(g)(3); see supra section II.C.
65
credit risk on an ongoing basis, 226 we are assuming that all money market fund complexes would
need to adopt new written policies and procedures to provide for this ongoing review in order to
comply with the amended provisions of rule 2a-7.
We estimate that each money market fund complex on average would incur a one-time
burden of 5 hours, 227 at a cost of $3,619, 228 to adopt policies and procedures for ongoing review
of minimal credit risks. Using an estimate of 103 money market fund complexes, 229 we estimate
that money market funds will incur, in aggregate, a total one-time burden of 515 hours, 230 at a
226
See supra note 116 and accompanying text.
227
These hour estimates assume that the process of adopting written policies and procedures will
consist primarily of transcribing and reviewing any existing policies and procedures that funds
currently use when monitoring minimal credit risk on an ongoing basis. Because we cannot
predict the extent to which funds may need to develop these policies and procedures to comply
with the amended provisions of rule 2a-7, or may need to transcribe and review any existing
policies and procedures, we have taken, as an estimated average burden, the mid-point of a range
of hour estimates discussed below in the following paragraph for purposes of our PRA analysis.
We estimate that the lower range of the one-time hour burden for a money market fund complex
to adopt policies and procedures for ongoing review to determine whether a money market fund’s
portfolio securities continue to present minimal credit risks would be 3.5 hours (2 hours by a
compliance manager and 1 hour by an attorney to develop and review policies and procedures (or
transcribe and review pre-existing policies and procedures) + 0.5 hours for the fund’s board to
adopt the policies and procedures). We estimate that the upper range of the one-time hour burden
for a money market fund complex to adopt such policies and procedures would be 6.5 hours (4
hours by a compliance manager and 2 hours by an attorney to develop and review policies and
procedures (or transcribe and review pre-existing policies and procedures) + 0.5 hours for the
fund’s board to adopt the policies and procedures). The mid-point of the lower range estimate
and the upper range estimate is 5 hours.
228
This estimate is based on the following calculation: (3 hours (mid-point of 2 hours and 4 hours
incurred by a compliance manager) x $283 (rate for a compliance manager) = $849) + (1.5 hours
(mid-point of 1 hour and 2 hours incurred by an attorney) x $380 (rate for an attorney) = $570) +
(0.5 hours x $4,400 per hour for a board of 8 directors = $2,200)= $3,619. The staff previously
estimated in 2009 that the average cost of board of director time was $4,000 per hour for the
board as a whole, based on information received from funds and their counsel. Adjusting for
inflation, the staff estimates that the current average cost of board of director time is
approximately $4,400 per hour.
229
Based on data from Form N-MFP and iMoneyNet as of April 30, 2015. The Proposing Release
PRA statement was based on data as of February 28, 2014. We have updated the estimates used
in this final PRA to reflect more current data as of April 30, 2015.
230
This estimate is based on the following calculation: 5 hours x 103 money market fund complexes
66
cost of $372,757, 231 to comply with the amended provisions of rule 2a-7. Amortizing these
hourly and cost burdens over three years results in an average annual increased burden for all
money market fund complexes of 172 hours 232 at a cost of $124,252. 233 There will be no external
costs associated with this collection of information.
3. Stress Testing
Rule 2a-7 currently requires money market funds to adopt written stress testing
procedures and to perform stress tests according to these procedures on a periodic basis. 234 We
are adopting as proposed amendments to rule 2a-7 that would replace the reference to ratings
downgrades in the rule’s stress testing provisions with a hypothetical event that is designed to
have a similar impact on a money market fund’s portfolio. 235 The amendment is designed to
retain a similar standard for stress testing as under current rule 2a-7. Specifically, while rule
2a-7 currently requires a fund to stress test its portfolio based on certain hypothetical events,
including a downgrade of portfolio securities, the adopted amendment will require a fund to
stress test for an event indicating or evidencing credit deterioration in a portfolio security, and
will include a downgrade or default as examples of that type of event. As discussed below, we
recognize that a money market fund could use its current policies and procedures to comply with
the amendment, and could continue to use credit quality evaluations prepared by outside sources,
= 515 hours.
231
This estimate is based on the following calculation: $3,619 x 103 money market fund
complexes = $372,757.
232
This estimate is based on the following calculation: 515 hours ÷ 3 years = 172 hours.
233
This estimate is based on the following calculation: $372,757 ÷ 3 years = $124,252.
234
See current rule 2a-7(g)(8).
235
Rule 2a-7(g)(8)(i)(B); see supra section II.D.
67
including NRSRO downgrades, in stress tests. 236 Because the rule currently requires testing for a
downgrade as a hypothetical event, we do not believe that funds will take any additional time to
review and revise their policies and procedures with respect to the continued use of downgrades
in stress testing. Accordingly, we do not expect the amendments will significantly change
current collection of information burden estimates for rule 2a-7. 237
Total Burden for Rule 2a-7. The current approved collection of information for rule 2a-7
is 632,244 annual aggregate hours. The aggregate additional burden hours associated with the
adopted amendments to rule 2a-7 increase the burden estimate to 632,725 hours annually for all
funds. 238
B. Rule 30b1-7 and Form N-MFP
Rule 30b1-7 requires money market funds to file a monthly report electronically on Form
N-MFP within five business days after the end of each month. The information required by the
form must be data-tagged in XML format and filed through EDGAR. Preparing Form N-MFP
is a collection of information under the PRA. 239 The respondents to this collection of
information are money market funds. A fund must comply with the requirement to prepare
Form N-MFP in order to hold itself out to investors as a money market fund or the equivalent of
a money market fund in reliance on rule 2a-7. This collection of information is mandatory for
money market funds that rely on rule 2a-7, and responses to the disclosure requirements of
236
See infra text surrounding note 288.
237
See id.
238
This estimate is based on the following calculation: 632,244 hours (current approved burden) +
309 hours (eligible security determinations for money market fund portfolio securities, including
securities that are subject to a conditional demand feature) + 172 hours (monitoring minimal
credit risks) = 632,725 hours.
239
For purposes of the PRA analysis, the current burden associated with the requirements of rule
30b1-7 is included in the collection of information requirements of Form N-MFP.
68
Form N-MFP are not kept confidential.
Money market funds are currently required to disclose on Form N-MFP, with respect to
each portfolio security, whether the security is a first or second tier security or is unrated, as
well as the “designated NRSROs” for each security (and for each demand feature, guarantee, or
credit enhancement). 240 As discussed above, the adopted amendments will require that each
money market fund disclose on Form N-MFP, for each portfolio security, any rating assigned
by an NRSRO that the fund’s board of directors (or its delegate) considered in determining that
the security presents minimal credit risks (together with the name of the assigning NRSRO). 241
Because we believe that the majority of funds will continue to refer to credit ratings in making
minimal credit risk determinations, we do not believe the amendments to Form N-MFP will
result in material changes to the ongoing burden for most funds. 242 However, we believe that
funds will incur one-time costs to re-program their filing software to reflect the new
requirements of Form N-MFP.
We estimate that each fund will incur a one-time burden of 3 hours, 243 at a cost of $943
per fund, 244 to comply with the amended disclosure requirements of Form N-MFP. Using an
240
See Form N-MFP Items C.9, C.10, C.14.b-c, C.15.b-c, C.16.c-d.
241
See Form N-MFP Items C.9, C.10, C.14.e, C.15.c, C.16.d; supra section II.E. The proposal also
would have required disclosure of any rating assigned by an NRSRO to whose services the fund
or its adviser subscribes (together with the name of the assigning NRSRO). Because the
estimated burden assigned to the form amendments is only the one-time re-programming cost,
which will not be affected by the change from the proposal to the adopting release, the burden
estimate above has not been reduced to reflect the removal of this requirement.
242
See supra note 114.
243
We estimate that the one-time hour burden for a money market fund to re-program its Form
N-MFP filing software to reflect the new requirements of Form N-MFP would be 3 hours (1 hour
by a senior systems analyst, 1 hour by a senior programmer, and 1 hour by an attorney).
244
This estimate is based on the following calculation: (1 hour x $260 (rate for a senior systems
analyst) = $260) + (1 hour x $303 (rate for a senior programmer) = $303) + (1 hour x $380 (rate
for an attorney) = $380) = $943.
69
estimate of 537 money market funds that are required to file reports on Form N-MFP, 245 we
estimate that money market funds will incur, in the aggregate, a total one-time burden of 1,611
hours, 246 at a cost of $506,391, 247 to comply with the amended disclosure requirements of Form
N-MFP. Amortizing these hourly and cost burdens over three years results in an average annual
increased burden for all money market funds of 537 hours 248 at a cost of $168,797. 249 There will
be no external costs associated with complying with the amended disclosure requirements of
Form N-MFP. 250
The current approved collection of information for Form N-MFP is 83,412 annual
aggregate hours and $4,780,736 in external costs. The aggregate additional hours associated
with the amendments to Form N-MFP increase the burden estimate to 83,949 hours annually for
245
This estimate is based on a review of reports on Form N-MFP filed with the Commission for the
month ended April 30, 2015. The Proposing Release PRA statement was based on data as of
February 28, 2014. We have updated the estimates used in this final PRA to reflect more current
data as of April 30, 2015.
246
This estimate is based on the following calculation: 3 hours x 537 money market funds = 1,611
hours.
247
This estimate is based on the following calculation: $943 x 537 money market funds = $506,391.
248
This estimate is based on the following calculation: 1,611 hours ÷ 3 years = 537 hours.
249
This estimate is based on the following calculation: $506,391 ÷ 3 years = $168,797.
250
We understand that a certain percentage of money market funds that report information on Form
N-MFP license a software solution from a third party that is used to assist the funds to prepare
and file the required information, and that a certain percentage of money market funds retain the
services of a third party to provide data aggregation and validation services as part of the
preparation and filing of reports on Form N-MFP. See 2014 Money Market Fund Adopting
Release, supra note 6, at text accompanying nn.2334-2336.
We recognize that, in general, software service providers that modify their software may incur
additional external costs, which they may pass on to money market funds in the form of higher
annual licensing fees. See id. at text accompanying n. 2340. However, on account of the
relatively low per-fund one-time hour burden that we estimate in connection with the amended
disclosure requirements of Form N-MFP, we expect that any increase in licensing fees will be
insignificant, and thus we estimate that there are no external costs associated with the amended
Form N-MFP disclosure requirements.
70
all funds. 251 Because we estimate no external costs associated with complying with the
amended Form N-MFP disclosure requirements, the annual external costs associated with the
Form N-MFP collection of information would remain $4,780,736.
V.
ECONOMIC ANALYSIS
As discussed above, we are adopting amendments to rule 2a-7 and Form N-MFP under
the Investment Company Act to implement Section 939A of the Dodd-Frank Act, which requires
the Commission, to “review any regulation issued by [the Commission] that requires the use of
an assessment of the credit-worthiness of a security or money market instrument; and any
references to or requirements in such regulations regarding credit ratings.” 252 That section
further provides that the Commission shall “modify any such regulations identified by the review
. . . to remove any reference to or requirement of reliance on credit ratings and to substitute in
such regulations such standard of credit-worthiness as [the Commission] shall determine as
appropriate for such regulations.” 253
We are also amending rule 2a-7 to eliminate the exclusion to the issuer diversification
requirement for securities subject to a guarantee issued by a non-controlled person. As a result,
most non-government securities subject to a guarantee (including an asset-backed security with a
presumed sponsor guarantee) will have to comply with both the 5 percent diversification
requirement for issuers (including SPE issuers) and the 10 percent diversification requirement for
251
This estimate is based on the following calculation: 83,412 hours (current approved
burden) + 537 hours = 83,949 hours.
252
Pub. Law 111-203, Sec. 939A(a)(1)-(2). Section 939A of the Dodd-Frank Act applies to all
federal agencies.
253
Pub. Law 111-203, Sec. 939A(b). Section 939A of the Dodd Frank Act provides that agencies
shall seek to establish, to the extent feasible, uniform standards of creditworthiness, taking into
account the entities the agencies regulate and the purposes for which those entities would rely on
such standards.
71
guarantors and providers of demand features. 254
The economic baseline for our economic analysis is the regulatory framework as it exists
immediately before the adoption of these amendments, that is, the regulatory framework after the
amendments to rule 2a-7 were adopted in the 2014 Money Market Fund Adopting Release. As
discussed in more detail below, that release makes material changes to rule 2a-7 that we believe
may result in material changes to the money market fund industry. Because there is an extended
compliance period for those amendments, and we are not aware of any funds that are already
complying with all of the amendments, we do not know how market participants, including
money market fund managers selecting portfolio securities, may react as a result. Thus, we are
not able to provide quantitative estimates for the incremental effects of this rule’s amendments.
For example, under the baseline, institutional prime money market funds have floating NAVs
and maintain the distinction between first and second tier securities. We are unable to estimate
how institutional prime funds will choose to allocate their portfolios among first and second tier
securities under our amendments when they have floating NAVs and no commenters provided
any estimates. We discuss potential economic effects of complying with the amendments to the
rule, but without knowing how fund portfolio allocations may change we cannot quantify these
potential effects. For the remainder of our economic analysis, we discuss separately the rule 2a7 amendments to remove and replace ratings references, Form N-MFP amendments, and the
amendments to rule 2a-7’s issuer diversification provision.
A. Rule 2a-7: Ratings Removal and Related Amendments
254
As discussed above, the asset-backed security presumed guarantee is counted toward the 10%
limitation on guarantees and demand features provided by the same institution. Up to 15% of the
value of securities held in a tax-exempt money market fund’s portfolio may be subject to
guarantees or demand features from a single institution, and up to 25% of the value of securities
held in a single state money market fund portfolio may be issued by any single issuer. See supra
section II.F.
72
The amendments to rule 2a-7 will affect five elements of the current rule. These are: (i)
determination of whether a security is an eligible security; (ii) determination of whether a
security is a first tier security; (iii) credit quality standards for securities with a conditional
demand feature; (iv) requirements for monitoring securities for ratings downgrades and other
credit events; and (v) stress testing. 255 The amendments are designed to remove any requirement
of reliance on credit ratings and to substitute standards of creditworthiness that we believe are
appropriate.
1. Economic Baseline
As discussed above, the current credit risk limitations in rule 2a-7 require that money
market funds undertake a two-step analysis before acquiring a portfolio security. 256 First, funds
must determine whether a security has received credit ratings from the “requisite NRSROs” in
one of the two highest short-term rating categories or, if the security is unrated, determine that it
is of comparable quality. A money market fund must currently invest at least 97 percent of its
portfolio in first tier securities, which are eligible securities that have received a rating from the
requisite NRSROs in the highest short-term rating category for debt obligations, or unrated
securities of comparable quality. Second, the fund’s board of directors (or its delegate) must
determine that the security presents minimal credit risks, based on factors pertaining to credit
quality in addition to any rating assigned to such securities by a designated NRSRO. In addition,
under current rule 2a-7, a security subject to a conditional demand feature may be determined to
255
The final rule will also make conforming amendments to rule 2a-7’s recordkeeping and reporting
requirements. See rule 2a-7(h)(3).
256
See supra note 25 and accompanying and preceding text. The credit risk limitations of current
rule 2a-7, as well as the other specific provisions of current rule 2a-7 that reference credit ratings,
were not changed by the adoption of the amendments discussed in the 2014 Money Market Fund
Adopting Release.
73
be an eligible security or a first tier security if, among other conditions: (i) the conditional
demand feature is an eligible security or a first tier security, and (ii) the underlying security (or
its guarantee) has received either a short-term rating or a long-term rating, as the case may be,
within the highest two categories from the requisite NRSROs or is a comparable unrated
security.
Based on Form N-MFP filings from April 30, 2015, the Commission estimates that 98.26
percent of aggregate money market fund assets are in first tier securities, 0.14 percent of
aggregate money market fund assets are in second tier securities, and 1.6 percent of aggregate
money market fund assets are in unrated securities. Among the 537 funds that filed Form
N-MFP that month, 412 funds reported that they held only first tier securities, 477 funds reported
that they held no second tier securities, and 447 funds reported that they held no unrated
securities. In addition, less than 4 percent of all money market funds held the maximum amount
of second tier securities permitted under current rule 2a-7. Using additional data from the
Federal Reserve Board, we estimate that money market fund holdings of second tier commercial
paper represent 0.9 percent of the outstanding issues of second tier commercial paper. 257
Securities subject to a conditional demand feature are typically variable rate demand
notes issued by municipalities that have a conditional demand feature issued by a bank. Based
on Form N-MFP filings as of April 30, 2015, the Commission estimates that 9.3 percent of
money market fund assets are invested in securities with a demand feature. We estimate further
that securities with conditional demand features represent 3.9 percent of securities with demand
257
This data is based on the Federal Reserve Board’s statistics on outstanding volume of commercial
paper as of April 30, 2015. See Commercial Paper Outstanding by special categories, available
at http://www.federalreserve.gov/releases/cp/outstanding.htm. The Proposing Release used
earlier data from this website. We have updated the figures used in this final rule analysis to
reflect more current data as of April 30, 2015.
74
features and 0.4 percent of all securities held by money market funds. We further estimate that
77 percent of those underlying securities (or their issuers or guarantors) have received an
NRSRO rating in the second-highest long-term rating category, while 23 percent have received
an NRSRO rating in the highest long-term category. 258
Rule 2a-7 currently requires a money market fund board (or its delegate) to promptly
reassess whether a security that has been downgraded by an NRSRO continues to present
minimal credit risks. 259 We understand that downgrades are rare among money market fund
portfolio securities. 260 As discussed above, we believe, based on staff experience, that most, if
not all, money market funds currently monitor portfolio securities for minimal credit risk on an
ongoing basis. 261 We assume for purposes of this analysis, however, that these funds do not have
written policies and procedures that specifically address ongoing minimal credit risk monitoring.
Finally, rule 2a-7 currently requires money market funds to stress test their portfolios. 262
Under the rule, a money market fund’s board of directors must adopt written procedures to test
the ability of a fund to maintain at least 10 percent of its total assets in weekly liquid assets and
minimize principal volatility (and, in the case of a money market fund using the amortized cost
258
An underlying long-term security would become a short-term security when its remaining time to
maturity is less than 397 days. See supra note 94. These estimates are based on a random sample
of 10% of the securities that have demand features that were reported in April 2015 Form N-MFP
filings.
259
See supra note 111 and accompanying text.
260
See, e.g., Response to Questions Posed by Commissioners Aguilar, Paredes, and Gallagher, a
report by staff of the Division of Risk, Strategy, and Financial Innovation (Nov. 30, 2012),
available at http://www.sec.gov/news/studies/2012/money-market-funds-memo-2012.pdf, at
14-16 (discussing events such as credit rating downgrades that have led money market fund
sponsors to choose to provide support to the fund or to seek staff no-action assurances permitting
such support). Staff continues to monitor credit rating downgrades among portfolio securities and
other issues concerning money market funds through the monthly information provided on Form
N-MFP.
261
See supra note 116 and accompanying text.
262
Current rule 2a-7(g)(8).
75
method of valuation or penny rounding method of pricing, the fund’s ability to maintain a stable
price per share) based on certain hypothetical events, including a downgrade or default of
particular portfolio security positions, each representing various portions of the fund’s portfolio.
We believe that funds stress test at least monthly. 263
2. Economic Analysis
The amendments to rule 2a-7 will assist in further implementing Section 939A of the
Dodd-Frank Act. They are designed to establish credit quality standards similar to those
currently in the rule. By replacing references to credit ratings, the amendments will, particularly
when considered together with other amendments the Commission has adopted that remove
credit ratings references in other rules and forms under the federal securities laws, contribute to
the Dodd-Frank Act goals of reducing perceived government endorsement of NRSROs and overreliance on credit ratings by market participants. 264
i.
Eligible securities
Under the final rule, a money market fund board (or its delegate) will be required to
determine minimal credit risk by applying certain credit quality factors. Because the application
of these factors may differ among fund boards and their advisers, the possible range of securities
available for investment may differ from that under the current rule. However, inclusion of the
credit analysis factors in the rule, as opposed to the more subjective standard in the proposed
rule, should limit this range by helping to make compliance more uniform across money market
funds. The final rule also clarifies that, when making minimal credit risk determinations, the
fund’s board (or its delegate) should consider the contribution of the security to aggregate credit
263
See 2014 Money Market Fund Adopting Release, supra note 6, at section IV.A.5.
264
See 2014 Money Market Fund Adopting Release, supra note 6, at n.202 and accompanying text.
76
risks and not just evaluate the security in isolation. In particular, a potential addition to the
portfolio that has low risk by itself might increase portfolio risk to unacceptable levels if it is
sufficiently correlated with the overall portfolio. For example, a security that has a very low
probability of default might be inappropriate for the fund if that security is likely to default at the
same time as other securities in the fund's portfolio.
In addition, we believe that fund managers are generally unlikely to increase exposure of
their funds to riskier second tier securities in light of both current market practices and
amendments to rule 2a-7 adopted in the 2014 Money Market Fund Adopting Release. 265 First,
we anticipate that many money market funds, particularly those that are themselves rated, are
likely to retain their current investment policies, which incorporate NRSRO ratings and would be
permitted under the rule amendments. Indeed, we understand that many funds today have
investment policies that are more restrictive than rule 2a-7 requires, including policies that, for
example, limit investments to first tier securities. 266 As a result, we do not expect that these
265
See, e.g., 2010 Money Market Fund Adopting Release, supra note 84, at section II.A.1
(discussing tradeoff between risk and yield for second tier securities). We do not believe fund
managers are likely to invest in securities rated below the second highest short-term rating
category of an NRSRO (or comparable unrated securities) because those securities would not
satisfy the standard for eligible securities that the security present minimal credit risks to the fund.
See discussion infra section V.2.ii.
266
As of February 2014, 179 money market funds, representing approximately 59% of all money
market fund assets (88% of all institutional money market fund assets) were themselves rated by
credit rating agencies, and approximately 98% of rated money market funds were rated in the top
credit quality category by an NRSRO. For a money market fund to receive this top rating, credit
rating agencies generally require the fund to limit its portfolio securities to first tier securities.
See, e.g., FitchRatings, Global Money Market Fund Rating Criteria (Mar. 26, 2013), available at
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=704145 (registration
required) (stating that its “AAAmmf” top rating requires that a money market fund have 100% of
its portfolio securities rated first tier (“F1+” or “F1”)); Standard & Poor’s, Methodology:
Principal Stability Fund Ratings (Jun. 8, 2011), available at
https://www.sbafla.com/prime/portals/8/RiskMan_Oversight/FundProfile/201106_SPPrincipalSta
bilityFundRatingsMethodology.pdf (stating that “[i]n order for a fund to be eligible for an
investment-grade rating, all investments should carry a Standard & Poor's short-term rating of
'A-1+' or 'A-1' (or SP-1+ or SP-1), or Standard & Poor's will consider all of the investments to be
77
money market funds will change current policies and procedures they have adopted that limit
their investments to those assigned the highest NRSRO ratings. We also noted above that
according to Form N-MFP filings from April 30, 2015, fund assets in second tier securities
represented 0.14 percent of total money market fund assets and that 18 funds (out of a total of
537) currently hold the maximum amount of second tier securities permissible under current rule
2a-7. We do not anticipate that money market funds representing the significant majority of
assets under management are likely to increase substantially their investments in riskier
securities as a result of our rule because these funds do not currently invest in second tier
securities to the extent permitted now.
Second, as discussed above, the 2014 amendments to rule 2a-7 should reduce the
potential that funds will invest in riskier securities. Under the 2014 reforms, money market
funds other than government money market funds are allowed to impose fees and gates, while
institutional prime money market funds will be required to transact at a floating NAV. 267 We
believe that those reforms may encourage non-government funds to more closely monitor fund
liquidity and hold more liquid securities to increase the level of daily and weekly liquid assets in
the fund to lessen the likelihood of needing to impose a fee or gate. These newly adopted money
market fund reforms also require each fund to disclose daily its market value rounded to four
decimal points (or an equivalent level of accuracy for a fund using a share price other than
$1.0000 268) and to depict historical information about its daily NAV for the previous six months.
These disclosures may increase informational efficiency by allowing investors to see variations
of equivalent credit quality”).
267
Rule 2a-7(a)(14) defines a government money market fund as a money market fund that invests
99.5% or more of its total assets in cash, government securities, and/or repurchase agreements
that are collateralized fully.
268
Rule 2a-7(h)(10)(iii).
78
in share value that are not apparent in the current share price and compare the volatility of share
values among funds over time. As a result, to the extent that institutional investors continue to
value price stability and can see these variations in share value, we believe that institutional
prime funds will endeavor to reduce NAV fluctuations.
Third, under the final rule funds are permitted to refer to credit ratings while making their
minimal credit risk determinations. A credit rating in the top short-term credit quality category
by an NRSRO might help support the fund’s determination that the security is an eligible
security, while a credit rating in a lower category might not support the same determination.
Thus, fund managers may have to perform additional credit research and analysis on the issuers
of second tier securities in order to determine whether the investment is permitted under the
adopted amendments. We believe that many fund managers may not wish to invest in the
additional resources necessary to make this assessment with respect to second tier securities
unless the fund believes that the expected risk-adjusted return of doing so would be greater than
the expected costs. Thus, the demand for securities rated second tier will likely be lower.
The final rule would eliminate the current limitations on fund investments in second tier
securities. 269 As a result, funds may increase their holdings of second tier securities despite the
considerations discussed above. Commenters on the 2014 Proposing Release were mixed in
their opinions as to whether the proposed changes would have this effect. Some believed that the
standard proposed would appropriately limit funds’ purchases of riskier securities, 270 while others
thought that it would not. 271 The Commission believes that the changes to the proposed standard
269
See supra note 30 and accompanying text and note 62.
270
See, e.g., Invesco Comment Letter; MFDF Comment Letter.
271
See, e.g., BlackRock Comment Letter; CFA Comment Letter; Vanguard Comment Letter.
79
made in this final rule should reduce the likelihood of increased credit risk because funds will
have to perform a rigorous analysis using the codified factors and consider a security’s potential
addition to the aggregate risk of the portfolio. We also believe that, to the extent money market
funds increase investments in riskier securities, institutional prime funds are more likely than
stable-NAV funds to do so because stable-NAV funds will need to maintain stability to avoid
falling below $1 per share. Although some shareholders may continue to value price stability
more than yield from institutional prime funds, if enough shareholders value yield more than
price stability, institutional prime funds will be incentivized to increase their investments in
second tier securities. Allocative efficiency may improve if such preferences result in relatively
riskier securities moving from the portfolios of stable NAV funds to the portfolios of institutional
prime funds, allowing money market fund shareholders to choose funds that better match their
preferences for risk and return. We do not, however, know whether institutional prime funds
with floating NAVs, which will have to compete with other money market funds, including
stable-NAV government funds, will focus on maintaining comparatively stable NAVs or on
generating comparatively high yields.
If we were to assume that money market funds increase their relative holdings of second
tier securities with the adoption of the amendments, the effects on competition and capital
formation would depend, in part, on whether the increased demand for second tier investments
comes from new assets that investors bring to money market funds, which are then
disproportionately invested in second tier securities, or whether the increased second tier
investments would come from a shift of existing money market fund assets from first tier
securities to second tier securities. If the former, the effects on competition between issuers of
first and second tier securities might be small, and capital formation might improve in the second
80
tier market as the size of the new investment increases. If the latter, an increase in capital
formation from issuers of second tier securities may result in a corresponding decrease in capital
formation from issuers of first tier securities, which, in turn, may lead to increased competition
between issuers of first and second tier securities. We are unable to estimate these effects
because we do not know how shareholders and funds will respond to the elimination of the
current limitation on fund investments in second tier securities and no commenters provided any
estimates.
The amendments to Form N-MFP, which are discussed in more detail below, may make
it easier for fund shareholders and other third parties to monitor the level of credit risk borne by
funds that use credit ratings. As a result, this increased transparency may reduce the likelihood
that fund boards (or managers) increase significantly fund investments in second tier securities.
We are requiring each money market fund to disclose on Form N-MFP those NRSRO ratings the
fund’s board (or its delegate) has considered, if any, in determining whether a security presents
minimal credit risks. 272 The disclosure to investors of these ratings may have the effect of
reducing the demand for funds that assume a level of risk that is different from that which is
desired by their shareholders.
As discussed above, the vast majority of money market funds held no second tier
securities on April 30, 2015, and few funds held the maximum permissible 3 percent. We
therefore believe that a reduction or even elimination of second tier securities from the money
market fund industry’s aggregate portfolio will not likely have a material effect on issuers of
272
Because the fund may only choose to consider one or two ratings, the specific rating or ratings
disclosed by a fund on Form N-MFP may not always be indicative of the overall universe of
ratings for that security. However, investors who wish to have a larger sample may choose to
subscribe to other ratings themselves.
81
either first or second tier securities. However, removing second tier securities from the
portfolios of individual money market funds may negatively affect yields in certain funds,
especially during periods when second tier securities offer substantially higher yields than the
yields offered by first tier securities.
We believe that most money market funds are not likely to change their current
investment policies in response to the adopted amendments. Nevertheless, we recognize that
some fund boards might choose not to consider NRSRO ratings in their credit assessments or as
noted above, fewer securities may be rated. If, as a result, the demand for NRSRO ratings were
significantly reduced, NRSROs might invest less in producing quality ratings. The importance
attached to NRSRO ratings currently as a result of the history of their use in regulatory
requirements may impart franchise value to the NRSRO rating business. By eliminating
references to NRSRO ratings in federal regulations, Section 939A of the Dodd-Frank Act could
reduce these franchise values and reduce NRSROs’ incentives to produce credible and reliable
ratings. If the quality and accuracy of NRSRO ratings were adversely affected, yet the ratings
continued to be used by enough other parties, the capital allocation process and economic
efficiency might be impaired as investors make investment decisions using lower-quality
information.
Conversely, the removal of ratings requirements in Commission rules may enhance
incentives for NRSROs to produce credible and reliable ratings, in order to remain competitive,
maintain revenue, and protect franchise value. In addition, certain industry commenters on the
2014 Proposing Release expressed support for the continued use of ratings as a tool in
determining creditworthiness. 273 Thus, we believe that a large majority of institutional money
273
See IDC Comment Letter; Invesco Comment Letter; MFDF Comment Letter.
82
market funds will continue to consider credit ratings in their evaluation of securities, at least as a
screening measure, and will continue to be rated themselves. To the extent that funds continue to
use ratings, which we believe most will, investors would be able to determine the ratings, and the
extent to which funds are considering those ratings, of fund portfolio securities from the
disclosures required under the amendments to Form N-MFP. Consequently, we believe it is
unlikely that the capital allocation process and economic efficiency will be materially impaired.
The Proposing Release provided the credit analysis factors as guidance, rather than in
rule text, and required that the fund make a finding that the issuer of a security had an
“exceptionally strong capacity” to meet its short-term financial obligations. 274 Because the final
rule is largely codifying the analysis that the staff believes money market fund managers
currently take into account, as discussed above, 275 the economic analysis for this final rule is
similar to that of the proposed rule. In this adopting release, we have incorporated into the rule
credit analysis factors, as well as providing asset-specific factors as guidance. As we noted in
the discussion above, based on staff observations in examinations and prior staff guidance, we
believe that most money market fund managers currently take these factors into account, as
appropriate, when they determine that a portfolio security presents minimal credit risks.
Moreover, the factors listed in the rule are to be considered “to the extent appropriate” 276 and are
not intended to rigidly define the parameters of an appropriate credit quality assessment; that is
for the fund’s board and its adviser to determine with respect to each particular security and the
fund’s overall risk profile. Thus, we do not anticipate that the rule’s inclusion of factors that a
274
See proposed rule 2a-7(a)(11).
275
See supra section IV.A.1.
276
Rule 2a-7(a)(11).
83
fund manager should consider will significantly change the process for evaluating credit quality
or that consideration of the factors listed in the rule and discussed in the release will significantly
affect the holdings in money market fund portfolios. For these reasons, we continue to believe
that the factors will not have a material effect on efficiency, competition, or capital formation.
Funds may, however, consider whether their policies and procedures for credit quality
assessment should be revised in light of the factors as codified, and, as a result, may need to
update them.
Finally, we note that Commission staff engages in ongoing monitoring of money market
fund risks and operations, through review of Form N-MFP filings, examinations, and other
outreach efforts, and provides regular updates to the Commission about relevant issues. As part
of these ongoing monitoring efforts, the staff also will undertake to study and report to the
Commission no later than 3 years following the adoption of these amendments to rule 2a-7 and
Form N-MFP the impact of these amendments on capital formation and investor protection. The
study will include, but not be limited to, a review of any changes in the risk profile of money
market fund portfolio security investments during the period studied and whether any additional
measures, including further investor protections, may be necessary.
ii.
Conditional Demand Feature
The final rule provides the same credit quality standard for securities with a conditional
demand feature as for other portfolio securities. The fund’s board (or its delegate) must
determine that a security with a conditional demand feature presents minimal credit risks to the
fund. We do not believe that fund managers will likely interpret this standard in a manner that
results in funds increasing the risk profiles of their underlying securities. First, as discussed
above, we do not believe that securities that are rated by NRSROs in the third-highest category
84
for long-term ratings (or comparable unrated securities) would satisfy the standard that
underlying securities present minimal credit risks to the fund. We also note that funds currently
can invest exclusively in underlying securities rated in the second-highest category if the
instrument meets the other conditions for eligibility. 277 We estimate that most underlying
securities held by money market funds (77 percent) are rated in the second-highest long-term
category, and a smaller portion (23 percent) are rated in the highest long-term category. 278 For
these reasons, we do not currently anticipate that funds are likely to increase the portion of their
underlying securities that are rated in the second-highest long-term category as a result of the
adopted amendments since these funds do not currently invest in these securities to the extent
permitted under existing rules.
For the reasons explained above, and because the minimal credit risk standard is largely
the same as what we understand that many funds apply now, and also the same as will be
required for all eligible portfolio securities, we believe that our rule will result in only small
changes to the practices of funds with respect to investments in securities with conditional
demand features. In addition, the elimination of the “very strong capacity” standard presented in
the proposal should result in little or no change to this analysis, as discussed above. 279 Thus, we
continue to believe that the conditional demand feature provision will result in little or no effect
on efficiency, competition, or capital formation for either funds or issuers.
As discussed above, we believe that the amendments to rule 2a-7 will cause money
market fund complexes to incur certain costs in reviewing and updating their policies and
277
Current rule 2a-7(d)(2)(iv).
278
See supra note 258 and accompanying text.
279
See supra section IV.A.1.
85
procedures. Specifically, each complex is likely to review the amendments to the credit quality
standards in rule 2a-7 and, as it determines appropriate in light of the amendments, revise its
policies and procedures to incorporate the amended credit quality evaluation method to be used
in determining the eligibility of a money market fund’s portfolio securities, including securities
that are subject to a conditional demand feature.
iii.
Ongoing Monitoring of Minimal Credit Risk
The Commission is adopting the ongoing monitoring provision as proposed. As
discussed above, we believe that the requirement that each money market fund adopt written
policies and procedures for ongoing monitoring of minimal credit risks for each portfolio
security essentially codifies the current practices of fund managers. 280 Although based on staff
experience we believe that most, if not all, money market funds currently monitor portfolio
securities for minimal credit risk on an ongoing basis (as rule 2a-7 requires 281), we note that
money market funds are not currently required to maintain written policies and procedures that
specifically address monitoring. We believe that to the extent that some money market funds
may not have written procedures to regularly monitor minimal credit risks, our provision to
require such procedures is designed to ensure that funds are better positioned to identify quickly
potential risks of credit impairment that could impact portfolio security prices. The costs
associated with the minimal credit risk monitoring requirement, as discussed above, will vary
based on the extent to which funds’ existing procedures need to be transcribed and reviewed. 282
We continue to believe that the requirement for written procedures in the final rule will not
materially affect efficiency, competition, or capital formation because we expect no material
280
See supra section II.C.
281
See id.
282
See supra note 226 and accompanying text.
86
changes in how funds invest.
iv.
Stress Testing
The Commission is adopting the stress testing provision as proposed. As discussed
above, the amendments are designed to retain similar standards for stress testing as under current
rule 2a-7. Specifically, the amendments will remove the current reference to ratings downgrades
in the rule 2a-7 stress testing requirement, and instead require funds to test for an event
indicating or evidencing credit deterioration of particular portfolio security positions, with a
downgrade or default provided as examples of such an event. Consequently, we recognize that a
money market fund could use its current policies and procedures for stress testing, including
testing for a downgrade, to comply with the amendments. We believe that funds will do so
because a downgrade by a relevant NRSRO may impact the price of a portfolio security. 283
Commenters on the stress testing provision of the Proposing Release were uniformly supportive
of this approach, 284 and one specifically stated that the amendments would not significantly
change the substance of current stress tests. 285 We believe this provision thus provides a clear
benefit by reducing any perceived endorsement of NRSRO ratings. Because we believe that
funds will not change their stress testing policies and procedures in response to these
amendments, we also believe there will be little or no costs associated with them. 286 Thus we do
not anticipate that these amendments are likely to affect efficiency, competition, or capital
formation.
283
See Comment Letter of Investment Company Institute (Apr. 25, 2011) on the 2011 Proposing
Release.
284
See Barnard Comment Letter; BlackRock Comment Letter; ICI Comment Letter; Vanguard
Comment Letter; CFA Institute Comment Letter; MFDF Comment Letter.
285
See MFDF Comment Letter.
286
See supra note 236 and accompanying text.
87
v.
Policies and Procedures
As discussed above, money market funds have written policies and procedures for
complying with rule 2a-7, including policies and procedures for determining and reassessing
minimal credit risk and for stress testing the portfolio. 287 Although our final rule should not
require changes to these policies and procedures for most money market funds, we anticipate that
funds will likely review them and may revise them in consideration of the uniform credit quality
standard provided in the rule. We also anticipate that after such a review, many fund boards and
advisers will retain investment policies that reference NRSRO ratings. 288 Although we cannot
predict the number of funds that will review and revise their policies and procedures or the extent
to which funds may do so, we estimate that each fund will incur, at a minimum, the collection of
information costs discussed in the Paperwork Reduction Act section for a total average one-time
cost of approximately $2,838 per fund complex. 289 These minimum costs assume that a fund will
review its policies and procedures in consideration of the amendments and make minor changes
to conform with the revised rule text, but will not change significantly the policies and
procedures relating to the fund’s credit quality assessments, monitoring for minimal credit risk or
stress testing, which currently include consideration of NRSRO ratings.
As noted above, we believe that while funds currently monitor for minimal credit risks on
287
See rule 38a-1(a); rule 2a-7.
288
See supra note 213 and accompanying text. We also note that most commenters on the 2011
proposal supported permitting funds to continue to use ratings, and some asked us to clarify that
ratings continue to be a permissible factor for boards or their delegates to consider in making
credit quality determinations. See, e.g., 2011 Comment Letter of BlackRock Inc. (Apr. 25, 2011)
(“2011 BlackRock Comment Letter”); Comment Letter of the Independent Directors’ Council
(Apr. 25, 2011). Commenters on the 2014 proposal continued to stress the usefulness of credit
ratings. See IDC Comment Letter; Invesco Comment Letter; MFDF Comment Letter. Our
amendments to Form N-MFP, discussed above, reflect our clarification that ratings continue to be
a permissible tool to use in making credit quality determinations.
289
See supra note 218.
88
an ongoing basis, we assume that funds do not have written policies and procedures to address
monitoring. 290 We estimate the average one-time costs to adopt those written policies will be
$3,619 per fund. 291 Because we anticipate that our rule is not likely to change these fund policies
significantly, we believe it is not likely to have a significant impact on efficiency, competition, or
capital formation.
3. Alternatives
The Commission chose not to adopt certain credit quality standards and requirements
from the Proposing Release. First, the proposed rule would have required that a portfolio
security not only present minimal credit risks, but also that its issuer has an “exceptionally strong
capacity” to meet its short-term financial obligations. 292 As many commenters suggested, 293 we
now believe that this determination could create an unclear standard for determining eligible
securities that might change the current credit quality profile of money market funds, possibly
creating risk profiles in money market funds that are even more stringent than the current rule
provides for, as the discussion above details. 294 We believe that the rulemaking goal associated
with this aspect of the proposal of ensuring that only very high quality securities are purchased
by money market funds is more effectively carried out instead by the second change we have
made from the proposed rule, the codification of the general credit analysis factors. 295
The Proposing Release provided two lists of credit analysis factors for use in determining
290
See supra notes 116 and 226 and accompanying text.
291
See supra note 228.
292
Proposed rule 2a-7(a)(11).
293
See, e.g., Dreyfus Comment Letter; NYC Bar Comment Letter; Schwab Comment Letter.
294
See supra section II.A.
295
Rule 2a-7(a)(11).
89
whether a security presented only minimal credit risks to a fund. 296 The first was a list of general
factors for use with any security, and the second was an asset-specific list. The final rule
incorporates the list of general factors into the rule text, and we discuss in this release the assetspecific list as guidance. 297 As discussed above, 298 we believe that codifying the general factors
will help provide a uniform and objective check on credit risk that can be verified by our
examiners. We also believe that incorporating these factors into the rule text will further
promote effective and uniform application of the risk standard. These two changes together,
elimination of the “exceptionally strong capacity” language and codification of the factors,
should help to ensure that the rule will maintain the current risk characteristics of money market
funds and thus is not likely to have a significant effect on efficiency, competition, or capital
formation.
In addition to the changes to the primary risk standard, the final rule also changed the risk
standard for securities with conditional demand features. 299 The proposed rule would have
required that the issuer of the underlying security or the provider of a conditional demand feature
have a “very strong” capacity to meet its financial obligations. 300 As with the proposed
“exceptionally strong capacity” standard, some commenters felt that this standard could be
interpreted very differently by different funds. 301 In order to reduce confusion and preserve a
296
Proposing Release, supra note 3, at 47991-47993.
297
The general factors have also been amended based on comments received, with one new factor
added. See rule 2a-7(a)(11). We chose not to codify the asset-specific factors. See supra section
II.A.2.
298
See supra section II.A.2.
299
See rule 2a-7(d)(2)(iii).
300
See proposed rule 2a-7(d)(2)(iii).
301
See, e.g., Dreyfus Comment Letter; Fidelity Comment Letter. Some commenters also felt that the
need to apply two different standards would add to compliance costs without providing benefits
90
similar degree of credit quality to that currently present in fund portfolios, the Commission
determined instead to require that the issuer of the underlying security and the provider of the
conditional demand feature meet the same “minimal credit risks” standard.
In developing this final rule, we also considered changes consistent with the amendments
we proposed in 2011. The 2011 proposal would have required fund boards first to determine
whether securities are eligible securities based on minimal credit risks, and second to distinguish
between first and second tier securities based on subjective standards similar to those the ratings
agencies have developed to describe their ratings. However, we were persuaded by the concerns
some commenters expressed on the 2011 proposal, 302 and did not adopt these alternatives. In
particular, as several commenters noted, a two-tier approach could be confusing without
reference to objective standards, and fund advisers are likely to make many of the same
considerations in evaluating first and second tier securities. 303 In addition, we believe that the
adopted single standard will better reflect the risk limitation in the current rule. The 2011
proposal described the standard for second tier securities in language similar to the descriptions
NRSROs use for second tier securities, which fund managers might interpret as permitting funds
to invest in riskier second tier securities to a greater extent than under our final rule, which is
designed to limit investments to very high quality second tier securities. Such increased
investments in riskier second tier securities would have had the potential to increase the risk
profile of money market funds.
The two industry commenters on the 2014 proposal who discussed the elimination of the
in improving credit quality. See, e.g., Dreyfus Comment Letter; ICI Comment Letter; IDC
Comment Letter.
302
See Proposing Release, supra note 3, at 47988-47989.
303
See id.
91
first and second tier distinction supported it. 304 However, two other commenters expressed
concern that removal of the distinction and the limit on second tier securities could lead to funds
purchasing more risky securities. 305 As discussed above, 306 we believe that the codification of the
credit analysis factors in the final rule, combined with market discipline and staff oversight of
required N-MFP disclosures, should reduce this possibility.
The two-tier approach discussed above could have had different effects on competition
and capital formation than the effects on competition and capital formation stemming from the
adopted approach, as a result of ensuing increased or decreased investments in second tier
securities. However, we are unable to estimate the relative effects on competition or capital
formation because we do not know how shareholders and funds would respond to this approach
as compared to the final rule, and no commenters provided any estimates.
With respect to replacing the reference to ratings in determining the eligibility of
underlying securities (i.e., those that are subject to a conditional demand feature), we considered
a qualitative standard that NRSROs use to articulate long-term securities in the highest rating
category. We note generally that few issuers or guarantors have received long-term ratings in the
highest category. 307 Moreover, issuers assigned a short-term credit rating in the top category by
an NRSRO may have received a long-term rating in the second-highest (or lower) category. 308
304
See Fidelity Comment Letter; MFDF Comment Letter.
305
See Better Markets Comment Letter; CFA Comment Letter.
306
See supra section II.A.2.
307
See Vipal Monga & Mike Cherney, CFO Journal: Lose your Triple-A Rating? Who Cares?,
WALL ST. J. (Apr. 29, 2014) (noting the decline in companies with triple A long-term ratings).
308
See Moody’s Investors Service, Rating Symbols and Definitions, Apr. 2014,
https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004, at 6 (showing
the linkage between short-term and long-term ratings when such long-term ratings exist and
indicating that long-term ratings of “A3” or higher are compatible with the highest short-term
rating of “P-1”); Standard &Poor’s, About Credit Ratings (2012),
92
Because of the limited NRSRO assignments of the highest long-term ratings to issuers, managers
might have interpreted this alternative to preclude fund investments in a security subject to a
conditional demand feature (that is itself an eligible security) if the underlying security’s issuer
or guarantor is rated in the second-highest category. Such an interpretation could significantly
deviate from the credit quality standards in the current rule, which was not our intent. It also
would likely reduce money market fund investments in these securities.
In choosing to eliminate the current reference to ratings downgrades in the monitoring
standard of rule 2a-7, we considered the rule 2a-7 amendments that we proposed in 2011. 309
These proposed amendments would have required that, in the event the money market fund
adviser (or any person to whom the board has delegated portfolio management responsibilities)
becomes aware of any credible information about a portfolio security or an issuer of a portfolio
security that suggests that the security is no longer a first tier security or a second tier security, as
the case may be, the board or its delegate would have to promptly reassess whether the security
continues to present minimal credit risks. 310 Most of those who commented on this proposed
amendment objected to it as an inefficient method of notifying funds if a portfolio security is
potentially impaired. We were persuaded by these commenters’ concerns. 311
http://www.standardandpoors.com/aboutcreditratings/RatingsManual_PrintGuide.html (each
short-term rating corresponds to a band of long-term ratings. “For instance, the A-1 short-term
rating generally corresponds to the long-term ratings of ‘A+,’ ‘A,’ and ‘A-’.”); FitchRatings,
Ratings Definitions (2014),
https://www.fitchratings.com/jsp/general/RatingsDefinitions.faces?context=5&detail=507&conte
xt_ln=5&detail_ln=500 (indicating the relationship between short-term and long-term ratings
with a table and acknowledging that “lower relative short-term default risk, perhaps through
factors that lend the issuer’s profile temporary support, may coexist with higher medium-or
longer term default risk”).
309
See 2011 Proposing Release, supra note 4, at section II.A.3.
310
Id.
311
See 2014 Proposing Release, supra note 3, at section II.A.3.
93
Finally, we also considered removing the current reference to ratings downgrades in the
stress testing provisions of rule 2a-7 and replacing this reference with the requirement that
money market funds stress test their portfolios for an adverse change in the ability of a portfolio
security issuer to meet its short-term credit obligations. We had proposed this alternative in
2011, and commenters on the 2011 proposal who addressed this issue uniformly advocated
against removing the reference to a downgrade in the stress testing conditions. 312 We believe that
the 2011 proposed standard, as compared to the standard we are adopting today, was less clear
and that it would lead to more burdensome monitoring and greater inefficiencies in developing
hypothetical events for stress testing. In light of these commenters’ concerns, we thus decided to
adopt stress testing provisions in rule 2a-7 that would permit funds to continue to test their
portfolios against a potential downgrade or default, as discussed in more detail above. 313 As also
discussed above, commenters uniformly supported this provision. 314
Form N-MFP
The final rule’s amendments to Form N-MFP will require money market funds to
disclose NRSRO ratings that they use in their evaluations of portfolio securities. Specifically, a
fund will have to disclose for each portfolio security any NRSRO rating that the fund’s board of
directors (or its delegate) considered in making its minimal credit risk determination, as well as
the name of the agency providing the rating. NRSRO ratings provide one indicator of credit risk
of a fund’s portfolio securities and, as discussed above, we anticipate that they will continue to
be considered by many money market fund managers in performing credit quality assessments.
312
We had proposed this alternative in 2011 and received comments on it at that time. See id,
section II.A.4.
313
See supra section V.A.2.iv.
314
See supra notes 284-285 and accompanying text.
94
We believe this ratings information will be useful to the Commission, to investors, and to various
third parties as they monitor and evaluate the risks that fund managers take in both stable-NAV
and institutional prime funds.
1. Economic Baseline
Under the economic baseline outlined above, money market funds are required to
disclose in Form N-MFP the credit ratings for each portfolio security. 315 More specifically, funds
are currently required to identify whether a portfolio security is a first or second tier security or is
unrated, and to identify the “designated NRSROs” for each security (and for each demand
feature, guarantee, or other credit enhancement). This disclosure requirement was not changed
by the 2014 Money Market Fund Adopting Release.
As noted above, based on Form N-MFP filings from April 30, 2015, the Commission
estimates that 98.26 percent of aggregate money market fund assets are invested in first tier
securities, 0.14 percent of aggregate money market fund assets are invested in second tier
securities, and 1.6 percent of aggregate money market fund assets are invested in unrated
securities. Among the 537 funds that filed that month, 412 funds reported that they held only
first tier securities, 477 funds reported that they held no second tier securities, and 447 funds
reported that they held no unrated securities.
2. Economic Analysis
We anticipate that our amendments are likely to have two primary benefits. First, they
should reduce perceived government endorsement of NRSROs, particularly when considered
together with other amendments the Commission has adopted that remove credit ratings
315
Although some money market funds voluntarily disclose security credit ratings, money market
funds often rely on a staff no-action letter in not disclosing security credit ratings and “designated
NRSROs.” See supra note 142 and accompanying text.
95
references in today’s rule and other rules and forms under the federal securities laws. Second,
they will provide transparency on whether or not specific funds use credit ratings when making
investment decisions, and might make it easier, if ratings are used, for shareholders and other
interested parties to also use those ratings as part of their own risk assessments.
We anticipate that our amendments are likely to have two primary costs. First, they may
impose administrative costs on funds that need to re-program their Form N-MFP filing
software. 316 Second, because only funds that choose to consider credit ratings in assessing
minimal credit risk will be permitted to disclose NRSRO ratings on Form N-MFP, our final rule
may reduce transparency into one measure of the credit risk associated with securities purchased
by funds that do not choose to consider credit ratings. This loss of transparency could create
additional servicing costs for such funds if shareholders demanded new communications
regarding the credit quality of the portfolio, 317 though this problem may be mitigated by the fact
that sophisticated shareholders will often be aware of the ratings and other measures of credit
risk, even if they are not disclosed on Form N-MFP.
The net effect of the amendments to Form N-MFP is that funds will not be required or
permitted to disclose credit ratings if credit ratings are not considered in determining whether a
security is eligible for the portfolio. However, as discussed above, we believe that our
amendments will not result in any material changes for the majority of funds because they will,
we believe, continue to refer to credit ratings. We believe, therefore, that the amendments’
316
See supra notes 243-244 and accompanying text (discussion of re-programming costs in PRA
analysis).
317
See Comment Letter of the Dreyfus Corporation (Apr. 25, 2011) (“2011 Dreyfus Comment
Letter”) (opposing the elimination of credit ratings disclosures in Form N-MFP because of the
potential that the fund would bear increased shareholder servicing costs to provide additional
communications regarding the credit quality of the portfolio).
96
effects on efficiency, competition, and capital formation will likely be negligible. To the extent
that money market funds continue to consider NRSRO ratings in making their minimal credit
risk determinations, the amendments to Form N-MFP may reduce the potential that fund
managers will increase significantly fund investments in riskier second tier securities; a fund will
be required to disclose ratings considered in those credit determinations, and the ratings will
reflect that increased risk. As a result, the disclosure to investors of these risk indicators may
have the effect of penalizing funds that assume more risk.
Although this final rule reflects a change from the proposal by not requiring disclosure of
every rating that a fund subscribes to, we believe that it will have a negligible impact on the
overall costs and benefits of these amendments to Form N-MFP. Just as in the proposed rule,
funds will still have to report the ratings they considered, and adjust their compliance programs
to ensure such reporting. The extra reporting that would have been required under the proposed
rule would likely only have caused a very small burden on funds because funds would incur the
same reprogramming costs under either approach.
3. Alternatives
In the 2014 Proposing Release, the Commission presented an alternative to the now
adopted amendments to Form N-MFP that would have required greater disclosure of credit
ratings. Specifically, a fund would have had to disclose not only the ratings that it considered in
evaluating a security and the name of the NRSRO providing the rating, but also each rating
assigned by any NRSRO if the fund or its adviser subscribed to that NRSRO’s services, and the
name of that NRSRO. Several commenters on the proposed rule objected strongly to this
requirement, stating that it would be costly, onerous and that mere subscription to an NRSRO’s
services was not a good indication that a particular rating was part of the evaluation of a
97
particular security. 318 In developing this final rule, we were persuaded by these commenters and
now believe that requiring this level of disclosure is unnecessary. In addition, as noted by
commenters, requiring disclosure based on subscription might have increased costs and therefore
created a financial disincentive to the use of ratings subscriptions by funds. As a result, this
alternative might have decreased the amount of information used by fund managers to monitor
risk in the market. For all of these reasons, we believe that the alternative chosen in the final rule
is less likely than the other alternatives to impair efficiency, competition, and capital formation.
In developing this final rule, we also considered the 2011 proposal to completely
eliminate the following two form items: the item that requires a fund to identify whether a
portfolio security is a first tier security, a second tier security, or an unrated security; and the
item that requires the fund to identify the “requisite NRSROs” for each security (and for each
demand feature, guarantee, or other credit enhancement). Although we have eliminated the
terminology “requisite NRSRO”, we did not adopt this alternative because we now believe that
completely eliminating such disclosure requirements masks not only the credit ratings but also
information on whether or not the fund uses credit ratings when making its investment decisions.
We also considered not removing the current disclosure requirement as recommended by
several commenters to the 2011 Proposing Release. 319 We elected not to leave the current
disclosure requirements as is, but instead to adopt the required disclosure of NRSRO ratings only
in certain circumstances, with the final rule narrowing those circumstances to situations where
the fund actually uses the rating in its evaluation of credit quality. We believe these final
318
See, e.g., SIFMA Comment Letter; BlackRock Comment Letter.
319
See 2011 BlackRock Comment Letter; 2011 Dreyfus Comment Letter; Comment Letter of
Federated Investors, Inc. (Apr. 25, 2011); Comment Letter of the Securities Industry and
Financial Markets Association (Apr. 18, 2011).
98
amendments are more in keeping with Congressional intent underlying Section 939A of the
Dodd-Frank Act to reduce perceived government endorsement of credit ratings.
B. Exclusion from the Issuer Diversification Requirement
1. Economic Baseline
As discussed above, most money market fund portfolio securities that are subject to a
guarantee by a non-controlled person are currently subject to a 10 percent diversification
requirement on guarantors but no diversification requirement on issuers, while non-government
securities with guarantors that do not qualify as non-controlled persons are generally subject to
both a 5 percent diversification requirement with respect to issuers and a 10 percent
diversification requirement with respect to guarantors. 320 In July 2014, we adopted amendments
to rule 2a-7 that deem sponsors of asset-backed securities to be guarantors of the asset-backed
security (unless the fund’s board rebuts the presumption). 321 As a result, under rule 2a-7’s
definition of a guarantee issued by a non-controlled person, both non-asset-backed securities and
asset-backed securities subject to such a guarantee (including asset-backed securities with a
presumed sponsor guarantee) are excluded from the rule’s issuer diversification requirement.
That is, non-asset-backed securities and asset-backed securities subject to a guarantee by a noncontrolled person are subject to a 10 percent diversification requirement on guarantors, but they
are not subject to a 5 percent issuer diversification requirement on the issuer. 322 This forms the
320
We note that single state funds may invest up to 25 percent of fund assets in securities of any
single issuer, and tax-exempt funds may have as much as 15 percent of the value of portfolio
securities invested in securities subject to guarantees or demand features issued by a single
provider that is a non-controlled person. Rule 2a-7(d)(3)(i)(B); rule 2a-7(d)(3)(iii)(B).
321
We also adopted an amendment to rule 2a-7’s diversification provisions to provide that money
market funds limit their exposure to affiliated groups, rather than to discrete issuers. See rule 2a7(d)(3)(ii)(F).
322
See current rule 2a-7(a)(18) (definition of guarantee); current rule 2a-7(a)(19) (definition of
99
economic baseline for the new diversification amendments that we are adopting today.
2. Economic Analysis
We believe that a small number of money market funds rely on the issuer diversification
exclusion for securities subject to a guarantee by a non-controlled person. In the Proposing
Release, staff’s analysis of February 2014 Form N-MFP data showed that only 8 out of 559
money market funds held securities with a guarantee by a non-controlled person that exceeded
the 5 percent diversification requirement for issuers. We stated in the Proposing Release that we
believed that these funds in February 2014 relied on the exclusion from the 5 percent issuer
diversification requirement with respect to issuers of securities that are subject to a guarantee
issued by a non-controlled person.
In response to commenters, staff supplemented its analysis using October 2014 and April
2015 Form N-MFP data to review the number of funds that exceeded the 5 percent
diversification limit. 323 Staff found, as discussed above, that as of October 2014 and April 2015,
only 0.0482 percent and 0.0624 percent, respectively, of total money market fund assets were
above the 5 percent issuer diversification threshold. As noted above, Commission staff found
that only tax-exempt money market funds appeared to be relying on the 5 percent issuer
diversification exclusion in October 2014 and April 2015. For October 2014 and April 2015,
staff found that only 0.1 percent and 0.5 percent, respectively, of national tax-exempt money
market fund assets were exposed to issuers above the 5 percent threshold.
Commission staff also separately analyzed the number of single state money market
guarantee issued by a non-controlled person); current rule 2a-7(d)(3)(i) (issuer diversification).
323
See supra note 191 and accompanying text.
100
funds that appear to be relying on the issuer diversification exclusion. 324 Because single state
funds have a 25 percent issuer diversification basket, staff analyzed issuer exposure above this
25 percent limit, which would suggest that the fund may be relying on the 5 percent issuer
diversification exclusion in order to obtain additional issuer exposure. In their analysis, staff
recognized that a single state money market fund could be relying on the issuer diversification
exclusion even when a fund’s exposure to a single issuer is below 25 percent. For example,
using the 25 percent issuer basket, a single state fund technically could have a 10 percent
exposure to Issuer A and a 15 percent exposure to Issuer B, while having an additional 7 percent
exposure to Issuer B using the 5 percent issuer diversification exclusion. In this scenario the
total amount of exposure to Issuer B is less than 25 percent, but the money market fund is
nonetheless relying on the issuer diversification exclusion. Staff analysis suggests that for
October 2014, 44 single state money market funds out of 97 total single state money market
funds were potentially relying on the 5 percent issuer diversification exclusion, and for April
2015, 38 single state money market funds out of 90 total single state money market funds were
potentially relying on the 5 percent issuer diversification exclusion. However, for October 2014
and April 2015, staff found that only 1.7 percent and 1.3 percent, respectively, of single state
money market fund assets were above the 5 percent issuer diversification threshold (while taking
into account the 25 percent issuer diversification basket). Therefore, while a number of single
state money market funds may be affected by the amended rule, a very small portion of their
assets will be affected.
We recognize that changes in fund assets could mask which funds rely on the issuer
324
As noted above, rule 2a-7 currently permits a single state fund to invest up to 25 percent of its
assets in any single issuer. See supra note 161 and accompanying text.
101
diversification exclusion at acquisition: a fund might be above the 5 percent limit today solely
due to a decline in fund assets after acquisition, and a fund might be below the 5 percent limit
today solely due to an increase in fund assets after acquisition. 325 Whatever the cause, a money
market fund that has invested more than 5 percent of its assets in an issuer of securities subject to
a guarantee issued by a non-controlled person in reliance on the exclusion under current rule 2a7 would, when those investments mature, have to reinvest the proceeds over 5 percent elsewhere.
Based on the additional analysis of Form N-MFP filings, we believe that a small percentage of
all money market funds (including a higher proportion of single state funds) would have to make
changes to their portfolios to bring them into compliance with the amendments. These changes
may or may not require the funds to invest in alternative securities, and the alternative securities
may or may not be inferior because they offer, for example, lower yields, lower liquidity, or
lower credit quality.
In response to commenters’ suggestion that the Commission consider a broader sample of
data, as discussed above, and to assess the amendment’s effect on yield, our staff examined
whether the 7-day gross yields of funds that use the 5 percent issuer diversification exclusion
were higher than the 7-day gross yields for funds that do not. Our staff found: (i) for national
tax-exempt money market funds in October 2014, the average yield for funds using the 5 percent
issuer diversification exclusion was 0.10 percent as compared to the average yield for funds that
did not use the 5 percent issuer diversification exclusion of 0.08 percent; (ii) for national taxexempt money market funds in April 2015, the average yield for funds using the 5 percent issuer
325
All of rule 2a-7’s diversification limits are applied at the time of acquisition. For example, a fund
may not invest in a particular issuer if, after acquisition, the fund’s aggregate investments in the
issuer would exceed 5 percent of fund assets. But if the fund’s aggregate exposure after making
the investment was less than 5 percent, the fund would not be required to later sell the securities if
the fund’s assets decreased and the fund’s investment in the issuer came to represent more than 5
percent of the fund’s assets.
102
diversification exclusion was 0.12 percent as compared to the average yield for funds that did not
use the 5 percent issuer exclusion of 0.11 percent; (iii) for single state money market funds in
October 2014, the average yield for funds using the 5 percent issuer diversification exclusion
was 0.10 percent as compared to the average yield for funds that did not use the 5 percent issuer
exclusion of 0.08 percent; and (iv) for single state money market funds in April 2015, the
average yield for funds using the 5 percent issuer diversification exclusion was 0.12 percent as
compared to the average yield for funds that did not use the 5 percent issuer exclusion of 0.07
percent. Although we do not believe the above differences in yield are material, we do recognize
that funds that appear to be relying on the exclusion have, on average, a higher yield than money
market funds that do not rely on the exclusion. In addition, we acknowledge that the current
low-interest rate environment may cause the yield spread in each comparison above to be less
than if we were measuring the yield spreads in a higher interest rate environment.
It appears that the elimination of the exclusion would affect the 63 money market funds
out of a total of 542 money market funds (or approximately 11.6 percent of all money market
funds) that exceeded the 5 percent issuer diversification limit as of April 2015, and would affect
the 0.0624 percent of total money market fund assets that were above the 5 percent issuer
diversification threshold, such that when those investments mature, the affected funds would
have to reinvest the proceeds over 5 percent elsewhere. Because of the minimal amount of
money market fund assets that would be affected by our amendment, we believe that the
potential lower yields, less liquidity or increased risks associated with the amendment will be
small for the affected funds. 326
326
Consider, for example, how reducing a position from 7 percent to 5 percent might affect fund
yields. The effect could be as small as 0 percent if the 2 percent of assets are reinvested in
securities that offer the same yield as the original 7 percent of assets. On the other hand, the
103
A couple commenters expressed concern regarding the amendment’s impact on the
supply of available securities for all money market funds. 327 One of these commenters suggested
that imposing further diversification limits could artificially lower the supply of available
issuers. 328 The second commenter suggested that the amendment would unnecessarily restrict
the amount of asset-backed securities, and particularly asset-backed commercial paper, available
for purchase by money market funds. 329 In addition, a couple of commenters argued that the
proposed amendment would cause certain issuers to experience decreased demand and increased
financing costs. 330 Another commenter argued that removing the issuer diversification exclusion
may increase the number of guarantors held in a fund’s portfolio, some of which may present
marginally greater credit risks. 331 This commenter further argued that repealing the exclusion to
increase diversification may actually diminish the percentage of the portfolio subject to credit
enhancement as well as the overall credit quality of the guarantors. 332
portfolio change could decrease fund yields by as much as approximately 29 percent if all of the
portfolio yield came from the 7 percent security. We believe that funds will choose alternative
securities that have similar yields as the securities replaced.
327
As discussed above, some commenters also voiced supply concerns specifically with respect to
tax-exempt money market funds.
328
See BlackRock Comment Letter. This commenter suggested that many changes to the money
market fund market may occur as a result of both the 2014 money market fund amendments and
the 2014 proposed amendments relating to NRSRO ratings removal and suggested that the
Commission wait to see the effects of those amendments before adopting additional
diversification amendments.
329
See SFIG Comment Letter. SFIG stated that, as of June 30, 2014, money market funds held over
$89 billion of asset-backed commercial paper, representing approximately 36 percent of the
overall asset-backed commercial paper market. SFIG also argued that the creditworthiness of any
single obligor of an asset-backed security would be less significant if that security was guaranteed
and suggested that an obligor of an asset-backed security only be treated as an issuer of that
security if its obligations constitute 20 percent of the obligations of that security rather than apply
the 10 percent obligor provision under rule 2a-7(d)(3)(B).
330
See Fidelity Comment Letter; SIFMA Comment Letter.
331
See ICI Comment Letter.
332
See id.
104
We recognize that the removal of the issuer diversification exclusion and tightening of
issuer diversification requirements for securities subject to a guarantee by a non-controlled
person may impact issuers of these securities and the fund’s risk profile. We also recognize that
the amendment may occasionally prevent some issuers from selling securities to a money market
fund that would otherwise invest in the issuer’s securities above the 5 percent diversification
requirement, but we believe, as discussed below, that the effect on such issuers would be
negligible. In addition, while we recognize that removing the exclusion may cause some money
market funds to invest in securities with higher credit risk, we note that a money market fund’s
portfolio securities must meet certain credit quality requirements, such as posing minimal credit
risks, as discussed above. 333 We therefore continue to believe that the substantial risk limiting
provisions of rule 2a-7 would mitigate the potential that these money market funds would
significantly increase their investments in securities with higher credit risk. We also continue to
believe that eliminating this exclusion would more appropriately limit money market fund risk
exposures by limiting the concentration of exposure that a money market fund could have
otherwise had to a particular issuer. We assume that all funds will incur costs associated with
updating their systems to reflect the amendment, as well as the associated compliance costs, if
their systems already incorporate this issuer diversification exclusion. We requested comment
on operational costs that funds would incur in connection with the amendment. No commenters
specifically addressed operational costs associated with the amendment. Accordingly, we
continue to believe that these costs will be small for all funds because we believe that all funds
currently have the ability to monitor issuer diversification to comply with rule 2a-7’s limits on
issuer concentration.
333
See rule 2a-7(d)(2) (portfolio quality); see supra section II.A.
105
Our diversification amendment offers two primary benefits. First, by requiring greater
issuer diversification for those funds that rely on the exclusion, the amendment will reduce
concentration risk in those funds and may make it easier for funds to maintain or generate
liquidity during periods when they impose fees and/or gates. Second, the amendment simplifies
rule 2a-7’s diversification requirements by eliminating the exclusion for securities with a
guarantee issued by a non-controlled person, which should lower certain compliance and
operational costs to the extent that funds no longer have to keep track of the securities that have
such guarantees and would be eligible for the exclusion.
Because we believe that the universe of affected funds and issuers is small, we continue
to believe that our amendment will have only negligible effects on efficiency, competition, and
capital formation. Although we recognize that this amendment may constrain more funds (and
issuers) in the future that otherwise would have less issuer diversification, we estimate, based on
our staff’s analysis of data from April 2015, that it will affect 63 funds, or approximately 11.6
percent of all money market funds today. Based on our staff’s analysis we also estimate that, as
of April 2015, our amendment will affect the 0.0624 percent of total money market fund assets
that were above the 5 percent issuer diversification threshold. Based on staff analysis of Form
N-MFP data and the amount of high quality securities available to tax-exempt money market
funds, we continue to believe that the affected funds will find comparable alternative securities
for the amount that exceeds 5 percent, and we believe that the affected issuers, to the extent
applicable, will find other investors willing to buy the amount that exceeds the 5 percent for a
comparable price.
3. Alternatives
As an alternative to eliminating the exclusion from issuer diversification for securities
106
with a guarantee issued by a non-controlled person, at the proposal stage we considered requiring
money market funds to be more diversified by lowering a fund’s permitted exposure to any
guarantor or provider of a demand feature from 10 percent to 5 percent of total assets. We
discussed potential benefits and costs of this alternative approach, and we requested comment on
it in the 2013 Money Market Fund Proposing Release. 334 As discussed in more detail above, we
decided that the current requirements for diversification of guarantors and providers of demand
features together with the issuer diversification requirement if applied generally to all securities,
as under the adopted amendment, appropriately address our concerns relating to money market
fund risk exposures. 335 We also believe that the potential costs of this alternative approach would
likely be more significant than the costs of our adopted amendment. As of the end of April 2015,
we estimate that approximately 110 (of 214) prime money market funds had total exposure to a
single entity (including directly issued, asset-backed commercial paper sponsorship, and
provision of guarantees and demand features) in excess of 5 percent. Under the alternative, any
fund that had exposure to an entity greater than 5 percent when those assets matured would have
to reinvest the proceeds of the securities creating that exposure in different securities or securities
with a different guarantor. Those changes may or may not require those funds to invest in
alternative securities, and those securities might present greater risk if they offered lower yields,
lower liquidity, or lower credit quality. The alternative approach would appear to affect many
more funds than would the amendment we are adopting today. As a result, we continue to
334
See 2013 Money Market Fund Proposing Release, supra note 16, at section III.J.4. We received
no comments on this alternative approach. We also requested comment in 2009 on whether to
reduce rule 2a-7’s current diversification limits. See 2009 Money Market Fund Proposing
Release, supra note 160, at section II.D. Most commenters opposed these reforms because,
among other reasons, the reductions could increase risks to funds by requiring the funds to invest
in relatively lower quality securities. See id. at n.909.
335
See supra text preceding and accompanying note 182.
107
believe that a better approach to achieving our reform goal would be to restrict risk exposures to
all non-government issuers of securities subject to a guarantee in the same way, and to require
money market funds (other than tax-exempt and single state funds as described above) that invest
in non-government securities subject to a guarantee to comply with the 5 percent issuer
diversification requirement and the 10 percent diversification requirement on guarantors.
4.
Technical Amendments
As discussed above, we are making technical amendments to certain diversification
provisions in rule 2a-7. Due to the nature of these amendments, we believe that the amendments
will have no effect on efficiency, competition, or capital formation.
VI.
REGULATORY FLEXIBILITY ACT CERTIFICATION
The Commission certified, pursuant to section 605(b) of the Regulatory Flexibility Act of
1980 336 that the proposed amendments to rule 2a-7 and form N-MFP under the Investment
Company Act, if adopted, would not have a significant economic impact on a substantial number
of small entities. 337 We included this certification in Section VI of the Proposing Release.
Although we encouraged written comments regarding this certification, no commenters
responded to this request.
STATUTORY AUTHORITY
The Commission is adopting amendments to rule 2a-7 under the authority set forth in
sections 6(c) and 38(a) of the Investment Company Act [15 U.S.C. 80a-6(c), 80a-37(a)] and
Section 939A of the Dodd-Frank Act. The Commission is adopting amendments to Form
336
5 U.S.C. 603(b).
337
Under the Investment Company Act, an investment company is considered a small business or
small organization if, together with other investment companies in the same group of related
investment companies, it has net assets of $50 million or less as of the end of its most recent
fiscal year. See 17 CFR 270.0–10.
108
N-MFP under the authority set forth in sections 8(b), 30(b), 31(a) and 38(a) of the Investment
Company Act [15 U.S.C. 80a-8(b), 80a-29(b), 80a-30(a) and 80a-37(a)] and Section 939A of the
Dodd-Frank Act.
List of Subjects in 17 CFR Parts 270 and 274
Investment companies, Reporting and recordkeeping requirements, Securities.
TEXT OF RULE AND FORM AMENDMENTS
In accordance with the foregoing, Title 17, Chapter II of the Code of Federal Regulations
is amended as follows:
PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940
1. The authority citation for part 270 continues to read as follows:
Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39, and Pub. L. No. 111203, sec. 939A, 124 Stat. 1376 (2010), unless otherwise noted.
*
*
*
*
*
2. Section 270.2a-7 is amended by:
a. In paragraph (a)(5), removing the words “and (D)”;
b. Removing paragraph (a)(11);
c. Redesignating paragraphs (a)(12) and (a)(13) as (a)(11) and (a)(12);
d. Revising newly designated paragraph (a)(11);
e. Removing paragraph (a)(14);
f. Redesignating paragraphs (a)(15) through (a)(21) as (a)(13) through (a)(19);
g. In newly designated paragraph (a)(16)(ii), removing the references “(a)(12)(iii)” and
“(d)(2)(iii)” and adding in their places “(a)(11)” and “(d)(2)(ii)”, respectively.
h. Removing paragraph (a)(22);
i. Redesignating paragraph (a)(23) as paragraph (a)(20);
109
j. Removing paragraph (a)(24);
k. Redesignating paragraph (a)(25) as paragraph (a)(21);
l. Removing paragraph (a)(26);
m. Redesignating paragraphs (a)(27) through (a)(31) as paragraphs (a)(22) through
(a)(26);
n. Removing paragraph (a)(32);
o. Redesignating paragraphs (a)(33) and (a)(34) as paragraphs (a)(27) and (a)(28);
p. In paragraph (c)(2)(i) removing the reference to “(c)(i)(A)” and adding in its place
“(c)(2)(i)(A)”.
q. Revising paragraph (d)(2);
r. Revising paragraph (d)(3)(i);
s. In paragraph (d)(3)(iii), removing the words “paragraphs (d)(3)(iii) and (d)(3)(iv)” and
adding in their place “paragraphs (d)(3)(i), (d)(3)(iii) and (d)(3)(iv)”;
t. In paragraph (d)(3)(iii)(A), removing the words “paragraphs (d)(3)(iii)(B) and
(d)(3)(iii)(C)” and adding in their place “paragraphs (d)(3)(i) and (d)(3)(iii)(B)”;
u. Removing paragraph (d)(3)(iii)(C);
v. Revising paragraph (f);
w. Revising paragraph (g)(3);
x. In paragraph (g)(8)(i)(B), at the beginning of the paragraph removing the word “A”
and adding in its place “An event indicating or evidencing credit deterioration, such as a”;
y. Revising paragraph (h)(3); and
z. Revising paragraph (j).
The revisions read as follows:
110
§ 270.2a-7
Money market funds.
(a) * * *
(11) Eligible security means a security:
(i) With a remaining maturity of 397 calendar days or less that the fund’s board of
directors determines presents minimal credit risks to the fund, which determination must include
an analysis of the capacity of the security’s issuer or guarantor (including for this paragraph the
provider of a conditional demand feature, when applicable) to meet its financial obligations, and
such analysis must include, to the extent appropriate, consideration of the following factors with
respect to the security’s issuer or guarantor:
(A) Financial condition;
(B) Sources of liquidity;
(C) Ability to react to future market-wide and issuer- or guarantor-specific events,
including ability to repay debt in a highly adverse situation; and
(D) Strength of the issuer or guarantor’s industry within the economy and relative to
economic trends, and issuer or guarantor’s competitive position within its industry.
(ii) That is issued by a registered investment company that is a money market fund; or
(iii) That is a government security.
NOTE to paragraph (a)(11): For a discussion of additional factors that may be relevant in
evaluating certain specific asset types see Investment Company Act Release No. IC-31828
(9/16/15).
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(d) * * *
(2) Portfolio quality.
(i) General. The money market fund must limit its portfolio investments to those United
States dollar-denominated securities that at the time of acquisition are eligible securities.
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(ii) Securities subject to guarantees. A security that is subject to a guarantee may be
determined to be an eligible security based solely on whether the guarantee is an eligible
security, provided however, that the issuer of the guarantee, or another institution, has
undertaken to promptly notify the holder of the security in the event the guarantee is substituted
with another guarantee (if such substitution is permissible under the terms of the guarantee).
(iii) Securities subject to conditional demand features. A security that is subject to a
conditional demand feature (“underlying security”) may be determined to be an eligible security
only if:
(A) The conditional demand feature is an eligible security;
(B) The underlying security or any guarantee of such security is an eligible security,
except that the underlying security or guarantee may have a remaining maturity of more than 397
calendar days.
(C) At the time of the acquisition of the underlying security, the money market fund’s
board of directors has determined that there is minimal risk that the circumstances that would
result in the conditional demand feature not being exercisable will occur; and
(1) The conditions limiting exercise either can be monitored readily by the fund or relate
to the taxability, under federal, state or local law, of the interest payments on the security; or
(2) The terms of the conditional demand feature require that the fund will receive notice
of the occurrence of the condition and the opportunity to exercise the demand feature in
accordance with its terms; and
(D) The issuer of the conditional demand feature, or another institution, has undertaken to
promptly notify the holder of the security in the event the conditional demand feature is
substituted with another conditional demand feature (if such substitution is permissible under the
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terms of the conditional demand feature).
(3)
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(i) Issuer diversification. The money market fund must be diversified with respect to
issuers of securities acquired by the fund as provided in paragraphs (d)(3)(i) and (d)(3)(ii) of this
section, other than with respect to government securities.
(A) Taxable and national funds. Immediately after the acquisition of any security, a
money market fund other than a single state fund must not have invested more than:
(1) Five percent of its total assets in securities issued by the issuer of the security,
provided, however, that with respect to paragraph (d)(3)(i)(A) of this section, such a fund may
invest up to twenty-five percent of its total assets in the securities of a single issuer for a period
of up to three business days after the acquisition thereof; provided, further, that the fund may not
invest in the securities of more than one issuer in accordance with the foregoing proviso in this
paragraph at any time; and
(2) Ten percent of its total assets in securities issued by or subject to demand features or
guarantees from the institution that issued the demand feature or guarantee, provided, however,
that a tax exempt fund need only comply with this paragraph with respect to eighty-five percent
of its total assets, subject to paragraph (d)(3)(iii) of this section.
(B) Single state funds. Immediately after the acquisition of any security, a single state
fund must not have invested:
(1) With respect to seventy-five percent of its total assets, more than five percent of its
total assets in securities issued by the issuer of the security; and
(2) With respect to seventy-five percent of its total assets, more than ten percent of its
total assets in securities issued by or subject to demand features or guarantees from the
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institution that issued the demand feature or guarantee, subject to paragraph (d)(3)(iii) of this
section.
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(f) Defaults and other events.
(1) Adverse events. Upon the occurrence of any of the events specified in paragraphs
(f)(1)(i) through (iii) of this section with respect to a portfolio security, the money market fund
shall dispose of such security as soon as practicable consistent with achieving an orderly
disposition of the security, by sale, exercise of any demand feature or otherwise, absent a finding
by the board of directors that disposal of the portfolio security would not be in the best interests
of the money market fund (which determination may take into account, among other factors,
market conditions that could affect the orderly disposition of the portfolio security):
(i) The default with respect to a portfolio security (other than an immaterial default
unrelated to the financial condition of the issuer);
(ii) A portfolio security ceases to be an eligible security (e.g., no longer presents minimal
credit risks); or
(iii) An event of insolvency occurs with respect to the issuer of a portfolio security or the
provider of any demand feature or guarantee.
(2) Notice to the Commission. The money market fund must notify the Commission of
the occurrence of certain material events, as specified in Form N-CR (§ 274.222 of this chapter).
(3) Defaults for purposes of paragraphs (f)(1) and (2) of this section. For purposes of
paragraphs (f)(1) and (2) of this section, an instrument subject to a demand feature or guarantee
shall not be deemed to be in default (and an event of insolvency with respect to the security shall
not be deemed to have occurred) if:
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(i) In the case of an instrument subject to a demand feature, the demand feature has been
exercised and the fund has recovered either the principal amount or the amortized cost of the
instrument, plus accrued interest;
(ii) The provider of the guarantee is continuing, without protest, to make payments as due
on the instrument; or
(iii) The provider of a guarantee with respect to an asset-backed security pursuant to
paragraph (a)(16)(ii) of this section is continuing, without protest, to provide credit, liquidity or
other support as necessary to permit the asset-backed security to make payments as due.
(g) * * *
(3) Ongoing Review of Credit Risks. The written procedures must require the adviser to
provide ongoing review of whether each security (other than a government security) continues to
present minimal credit risks. The review must:
(i) Include an assessment of each security’s credit quality, including the capacity of the
issuer or guarantor (including conditional demand feature provider, when applicable) to meet its
financial obligations; and
(ii) Be based on, among other things, financial data of the issuer of the portfolio security
or provider of the guarantee or demand feature, as the case may be, and in the case of a security
subject to a conditional demand feature, the issuer of the security whose financial condition must
be monitored under paragraph (d)(2)(iii) of this section, whether such data is publicly available
or provided under the terms of the security’s governing documents.
*
*
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*
(h) * * *
(3) Credit risk analysis. For a period of not less than three years from the date that the
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credit risks of a portfolio security were most recently reviewed, a written record must be
maintained and preserved in an easily accessible place of the determination that a portfolio
security is an eligible security, including the determination that it presents minimal credit risks at
the time the fund acquires the security, or at such later times (or upon such events) that the board
of directors determines that the investment adviser must reassess whether the security presents
minimal credit risks.
*
*
*
*
*
(j) Delegation. The money market fund’s board of directors may delegate to the fund’s
investment adviser or officers the responsibility to make any determination required to be made
by the board of directors under this section other than the determinations required by paragraphs
(c)(1) (board findings), (c)(2)(i) and (ii) (determinations related to liquidity fees and temporary
suspensions of redemptions), (f)(1) (adverse events), (g)(1) and (g)(2) (amortized cost and penny
rounding procedures), and (g)(8) (stress testing procedures) of this section.
(1) Written guidelines. The board of directors must establish and periodically review
written guidelines (including guidelines for determining whether securities present minimal
credit risks as required in paragraphs (d)(2) and (g)(3) of this section) and procedures under
which the delegate makes such determinations.
(2) Oversight. The board of directors must take any measures reasonably necessary
(through periodic reviews of fund investments and the delegate’s procedures in connection with
investment decisions and prompt review of the adviser’s actions in the event of the default of a
security or event of insolvency with respect to the issuer of the security or any guarantee or
demand feature to which it is subject that requires notification of the Commission under
paragraph (f)(2) of this section by reference to Form N-CR (§ 274.222 of this chapter)) to assure
that the guidelines and procedures are being followed.
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*
*
*
*
*
3. Section 270.12d3-1(d)(7)(v) is amended by removing the reference to “270.2a7(a)(18)” and adding in its place the phrase “270.2a-7(a)(16)”;
4. Section 270.31a-1(b)(1) is amended by removing the phrase “(as defined in
§ 270.2a-7(a)(9) or § 270.2a-7(a)(18) respectively)” and adding in its place the phrase “(as
defined in § 270.2a-7(a)(9) or “§ 270.2a-7(a)(16) respectively)”.
PART 274—FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF
1940
5. The authority citation for part 274 continues to read in part as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m, 78n, 78o(d), 80a-8, 80a24, 80a-26, 80a-29, and Pub. L. No. 111-203, sec. 939A, 124 Stat. 1376 (2010), unless otherwise
noted.
*
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*
*
*
6. Form N-MFP (referenced in § 274.201) is amended by:
a. Revising Item C.9;
b. Revising Item C.10;
c. Removing Items C.14.b and C.14.c;
d. Redesignating Items C.14.d through C.14.f as Items C.14.b through C.14 d;
e. Adding new Item C.14.e;
f. Removing Items C.15.b and C.15.c;
g. Redesignating Item C.15.d as Item C.15.b;
h. Adding new Item C.15.c;
i. Removing Items C.16.c and C.16.d;
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j. Redesignating Item C.16.e as Item C.16.c; and
k. Adding new Item C.16.d.
l. Revising the definition of “Money Market Fund” in General Instructions—E.
Definitions.
The additions and revisions read as follows:
Note: The text of Form N-MFP does not, and this amendment will not, appear in the
Code of Federal Regulations.
FORM N-MFP
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*
*
*
*
Item C.9
Is the security an Eligible Security? [Y/N]
Item C.10
Security rating(s) considered. Provide each rating assigned by any NRSRO that
the fund’s board of directors (or its delegate) considered in determining that the security presents
minimal credit risks (together with the name of the assigning NRSRO). If none, leave blank.
*
*
Item C.14
*
*
*
*
*
*
e. Rating(s) considered. Provide each rating assigned to the demand feature(s) or demand
feature provider(s) by any NRSRO that the board of directors (or its delegate) considered in
evaluating the quality, maturity or liquidity of the security (together with the name of the
assigning NRSRO). If none, leave blank.
*
*
Item C.15
*
*
*
*
*
*
c. Rating(s) considered. Provide each rating assigned to the guarantee(s) or guarantor(s)
by any NRSRO that the board of directors (or its delegate) considered in evaluating the quality,
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maturity or liquidity of the security (together with the name of the assigning NRSRO). If none,
leave blank.
Item C.16
*
*
*
d. Rating(s) considered. Provide each rating assigned to the enhancement(s) or
enhancement provider(s) by any NRSRO that the board of directors (or its delegate) considered
in evaluating the quality, maturity or liquidity of the security (together with the name of the
assigning NRSRO). If none, leave blank.
*
*
*
*
*
E. Definitions * * *
“Money Market Fund” means a registered open-end management investment company, or series
thereof, that is regulated as a money market fund pursuant to rule 2a-7 (17 CFR 270.2a-7) under
the Investment Company Act of 1940.
*
*
*
*
*
7. Form N-1A (referenced in § 274.11A) is amended by revising the definition of
“Money Market Fund” in General Instructions—A. Definitions.
The revision reads as follows:
Note: The text of Form N-1A does not, and this amendment will not, appear in the Code
of Federal Regulations.
FORM N-1A
*
*
*
*
*
“Money Market Fund” means a registered open-end management investment company,
or series thereof, that is regulated as a money market fund pursuant to rule 2a-7 (17 CFR 270.2a7) under the Investment Company Act of 1940.
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By the Commission
Dated: 9/16/15
Brent J. Fields
Secretary
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